Preannounced 4Q24 results largely in line with our forecasts

Sun Paper preannounced its 2024 results: Revenue rose 3% YoY to Rmb40.7bn and attributable net profit attributable grew 1.29% YoY to Rmb3.13bn. In 4Q24, attributable net profit fell 5% QoQ to Rmb667mn and asset-liability ratio was 45.5%, down 2.76ppt from the beginning of 4Q24. The results were largely in line with our forecasts.

Trends to watch

Earnings fell slightly QoQ in 4Q24 due to low paper prices and relocation of dissolving pulp production facilities. According to RISI, the average selling prices (ASP) of two-side offset paper and coated paper fell Rmb266/t and Rmb151/t QoQ in 4Q24, and paper prices declined to a historical low. Meanwhile, the high cost of pulp inventory significantly squeezed earnings. In October 2024, the firm started to transfer 200,000t of dissolving pulp capacity from Yanzhou to Beihai, weighing on its output and sales volume.

We expect earnings to recover in 1-2Q25. Data from RISI shows that the ASP of two-side offset paper and coated paper rose Rmb100/t and Rmb123/t QoQ YTD. Paper prices began to recover slowly from end- November 2024 amid a large-scale production halt at Chenming Paper Holdings and a mild recovery in demand. Therefore, we expect the firm’s earnings to recover QoQ in 1Q25 commensurate with paper price rallies.

In addition, we expect the firm’s sales volume, ASP, and profit to recover in 2Q25, as the second quarter is typically a peak season for the bidding of P&W paper projects, and relocation of the firm’s dissolving pulp facilities is scheduled to be completed in April. We also note that the dissolution of the pulp production project will benefit the firm once the latter is relocated to Beihai, Guangxi province, thereby further lowering costs (especially for wood chips). It may also boost output and sales volume following technical upgrades.

Cost advantage solidified; resource products to be re-rated in the medium and long term. As of end-2024, Sun Paper had a planting area of about 70,000 hectares for wood chips. It plants more than 10,000 hectares of new forest land each year. We estimate that by 2030, the stock of wood chips from Laos could generate potential cost savings of more than Rmb1bn. Sun Paper is the only Chinese frontrunner with ample　forest land reserves overseas, and we think its efforts will soon pay off. We expect the firm to continue solidifying cost advantages.

A growing number of domestic papermaking firms are enhancing their pulp production capabilities, while Sun Paper has forged a competitive edge in forest land resources and gained a cost advantage in wood chips. We expect its forest land and wood chip assets to be re-rated as resource products. In the medium and long term, we are optimistic that the company will generate excess returns by solidifying cost advantages, improving management, and enriching product portfolios.

Financials and valuation

Given weak paper prices in 4Q24, we lower our 2024 revenue forecast by 2%. We keep our 2024-2026 earnings forecast largely unchanged. The stock is trading at 11.3x 2025e and 10.6x 2026e P/E. We maintain OUTPERFORM and our TP of Rmb18, implying 15x 2025e and 14x 2026e P/E, offering 32% upside.

Risks

Disappointing demand; sharper-than-expected fluctuations in costs; production capacity increases more than expected; risks related to overseas base operations.