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Company Profile Xianhe Co., Ltd. is a China-based company principally engaged in the research and development, manufacture and sales of specialty papers. The company"s main products include paper used in tobacco industry, paper used in home decorating, paper used in business communications and anti-counterfeiting, paper used in food and medical packaging, paper used in labels, electrical and industrial paper, paper used in thermal transfer, low quantitative publishing printing paper and others. The company mainly distributes its products within domestic market. （Source: Reuters）　　Event　　Recently, Xianhe （“the company”） releases its financial results for the third quarter 2022.　　For the first three quarters of the year, the company reported CNY 5.51 billion, CNY 567 million, CNY 462 million and CNY 103 million in revenue, net profit attributable to shareholders, net profit attributable to shareholders & excluding gains and losses from non-recurring items, and investment income respectively, a year-on-year （YoY） change of +26.32%, -37.22%, -46.05%and -56.91%. Specifically, the government subsidy amounted to CNY 89 million.　　For the third quarter, the company also reported CNY 1.912 billion, CNY 213 million, CNY 156 million and CNY 25 million in revenue, net profit attributable to shareholders, net profit attributable to shareholders & excluding gains and losses from non-recurring items, and investment income respectively, a QoQ change of -0.43%, +2.21%, -10.92% and -43.19%. The government subsidy reached CNY 54 million in the quarter.　　Comments 　　There is limited room for further rising of pulp prices in Q4.　　The company’s gross profit margin and net profit margin in the first three quarters of 2022 registered 12.56% and 10.29%, respectively, down by 10.61 pps and 10.42 pps year-on-year. Specifically, the gross profit margin and net profit margin in Q3 stood at 11.81% and 11.13%, a QoQ change of -2.39 pps and +0.29 pps.　　The significant decline in gross profit margin was caused by the high sourcing prices of pulp in Q2, as the inventory turnover period was about one quarter. The average prices of imported softwood and hardwood pulp rose by USD145/ton and USD163/ton to USD1005/ton and USD839/ton in Q2.　　Looking ahead, the prices of softwood and hardwood pulp went down by USD12/ton and up by USD46/ton to USD993/ton and USD885/ton in Q3. The pulp prices are consolidating at a high level and the company’s pulp cost growth is expected to slow down in Q4. 　　We are optimistic about the company’s profitability in 2023.　　The company’s cost pressure is expected to ease, as the pulp price is likely to be driven down by the production of two hardwood pulp projects in 2023, which are Arauco’s project of 1.56 million tons to be put into production in Chile in Q4, 2022 and UPM’s project of 2.10 million tons to be put into production in Uruguay in Q1, 2023.　　As Hefeng’s food paper project with an annual production capacity of 300,000 tons is to be put into operation in H2, 2022, the release of production capacity as well as the expected drop in pulp prices are set to drive up the company’s performance in 2023.　　Earnings forecast and investment recommendationWe estimate the company’s net profit attributable to shareholders at CNY 715 million, CNY 1.117 billion and CNY 1.586 billion for 2022, 2023 and 2024, respectively, a year-on-year change of -26.1%, +48.7% and +42% respectively, and implying a P/E ratio of 21.9x, 14.7x and 10.4x, based on the closing price on October 28, 2022.　　We maintain the rating of “Outperform”。　　Potential risks　　Rising raw material prices; less-than-expected release of new production capacity.【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。