1HFY25 results miss our expectations
Nine Dragons Paper announced its interim results: In 1HFY25 (i.e., 2H24), revenue rose 9.3% YoY to Rmb33.46bn, while net profit attributable to shareholders grew 60.6% YoY to Rmb470mn. Additionally, the firm's previously issued US dollar perpetual bonds generated approximately Rmb200mn in interest. The net profit was at the upper end of the preannounced range (Rmb430-480mn) but fell short of our expectations due to low paper prices and the lack of notable improvement in earnings.
1) Sales volume rose 18% YoY, while ASP continued to bottom out. According to the firm's announcement, total pulp and paper production capacity increased to 27.7mnt in 1HFY25 (vs. 24.8mnt in FY24), driven by the addition of 1.2mnt of ivory board and 1.7mnt of wood pulp capacity. Sales volume grew 14% YoY to 11.4mnt during the reporting period, including 940,000t of kraft linerboard. We estimate that the firm's ASP fell 3.7% YoY and 2.7% HoH to Rmb2,935/t in 1HFY25, due to sluggish domestic demand, a weak peak season, and a slight price increase driven by short-term restocking in 2H24.
2) Net profit per tonne recovering YoY but weak HoH. We estimate gross profit per tonne at Rmb260/t in 1HFY25 (-Rmb10 YoY and -Rmb54 HoH). In 3Q24, market demand remained sluggish, and paper prices hovered at low levels, resulting in only a slight profit for the firm. In 4Q24, leading linerboard and corrugated board companies raised prices by Rmb100-250/t amid declining overseas paper imports, rising export demand, and the upcoming peak season, leading to improved earnings QoQ. We estimate net profit per tonne at Rmb41, slightly higher than Rmb29 in the same period last year but still down Rmb9/t QoQ, near the lower end of the historical earnings range.
3) High capex. In 1HFY25, financial expenses totaled Rmb772mn (+28% YoY), mainly due to increased loans during the peak of capacity expansion. Capex rose 2.3% YoY to Rmb6.76bn, remaining at historically high levels. Operating cash flow and free cash flow amounted to Rmb4.27bn and - Rmb2.49bn.
Trends to watch
Capex nearing completion; earnings to grow in the peak season. The gearing ratio stood at 65.68% in 2H24 (vs. 64.96% in 2H23), while the net gearing ratio remained high at 115.2% in 2H24 (vs. 117.2% in 2H23). The firm's capex in 2025 remains at its peak but is approaching completion. NDP announced plans to put its scheduled 2025 capacity into operation, including a 600,000 t/yr printing & writing (P&W) paper production project in Jingzhou (Hubei) (1Q25), a 700,000 t/yr P&W project in Beihai (Guangxi), a 1.2mnt ivory board project in Hubei (2Q25), a 650,000t chemical pulp project, and a 700,000t chemithermomechanical pulp project in Jinzhou (2Q25). Once these projects reach full capacity, the firm's total production capacity for P&W and ivory board is likely to reach 3mnt each, with output potentially exceeding 2mnt.
We expect full-year demand for linerboard and corrugated board to grow mildly, with supply increasing at a low single-digit rate and imports remaining relatively stable. We maintain our view that the industry will sustain a broad supply-demand balance. The firm's profit per tonne is likely to remain between Rmb0-100/t before the peak season, as inventories at downstream tier-2 and tier-3 factories remain high following the Chinese New Year holiday in 2025. If peak-season demand exceeds expectations, the firm may seek to raise product prices to improve its profit per tonne.
Financials and valuation
Given weak demand, we cut our FY25 earnings forecast by 45% to Rmb1.44bn and introduce our FY26 net profit estimate at Rmb1.68bn. The stock is trading at 0.3x FY25e and 0.3x FY26e P/B. With the valuation rotation to FY25 and the recovery of net profit per tonne, we maintain our OUTPERFORM rating but lower our target price by 8% to HK$4.5, implying 0.4x FY25e and 0.4x FY26e P/B, implying 37% upside.
Risks
Weaker-than-expected demand; higher-than-expected incremental supply in the sector; sharper-than-expected impact from imported paper; higher- than-expected gearing ratio.