Paper printing: the possibility of further increase in future earnings

Recently, as the market adjusts, paper stocks generally fall below the market. Such market performance, we believe, means better investment opportunities.

The reasons for this market adjustment are complicated, and this report cannot be analyzed in detail. But one of the reasons why it is widely accepted by investors is that from the economic data in July, the recovery of China's economy does not seem to be as fast as expected. But for the paper industry, the actual profitability of the company will still be significantly higher than expected. At the same time, the early gains of paper stocks lag far behind the broader market. According to our current earnings forecast for Sun Paper, its valuation level is far below the market average and has the characteristics of both offensive and defensive.

At the beginning of May, we proposed that the paper industry began to raise prices. In the same period, the performance of the paper stocks is expected to enter the upward channel. Recently, through multi-party communication, we believe that the monthly performance of companies with large copper and white cards is expected to be significantly higher than expected. This report estimates the monthly profitability of Sun Paper in detail. We expect the EPS of the company to be 0.66 yuan in the second half of the year and 0.96 yuan for the whole year.

In the second half of the year, paper and pulp prices are more likely to change in the same direction. Under the premise that the marginal supply and demand of paper products continue to improve, if the two companies increase 200 yuan / ton at the same time, the net profit of enterprises will increase by 42 yuan, and the net profit per price will increase by 7 to 8.5%.

In the long run, overseas paper stocks have no excess returns relative to the broader market. However, from the perspective of market performance, when the profitability of the industry's assets is improving, the paper stocks can significantly outperform the market. The performance of paper stocks relative to the broader market is closely related to the company's return on net assets. In most cases, when the corporate ROE rises, the paper stock market performance can outperform the market; on the contrary, it underperforms.

The essence of buying paper stocks is the rising stage of buying paper assets' profitability. In other words, when buying and holding paper assets during the upswing of the paper industry, the increasing profitability of paper assets will increase the value of their stocks.

We believe that this trend will continue. There are two meanings to this: We believe that the trend of continued improvement in marginal supply and demand will continue. Second, we believe that the paper price increase cycle has not yet ended, and the profit per ton of paper will be further expanded. In terms of the degree of paper quality, the price increase and profitability of copper and white cards have increased, and the solar paper industry in listed companies has benefited a lot. The company will also increase its pulp and paper production capacity by about 500,000 tons next year. It is one of the few companies in the mainstream paper industry that has a growth point. In terms of valuation, we expect the company's performance in the third quarter will significantly exceed market expectations. PE will be significantly reduced in the event that its performance exceeds expectations, and there is still a possibility of further upward adjustment in future earnings forecasts.

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