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3Q22 results missed our and market expectations　　Sun Paper announced its 3Q22 results: In 1-3Q22, revenue grew 25% YoY to Rmb29.6bn, and net profit fell 18% YoY to Rmb2.27bn; in 3Q22, revenue rose 24% YoY to Rmb9.79bn, and net profit rose 13% YoY but fell 38% QoQ to Rmb609mn, missing our and market expectations, mainly due to falling demand for dissolving pulp in 3Q22.　　Comments:　　1. Pulp prices in cyclical uptrend; pulp sold main contributor to earnings. Sun Paper has more than 4.3mnt self-produced pulp capacity and sells above 1.5mnt of pulp per year on average. The firm’s pulp business has fully benefited from rising pulp prices. We estimate per-tonne net profit of dissolving pulp at more than Rmb1,000/t in 3Q22; but given the falling demand for dissolving pulp in 3Q22, per-tonne net profit may decline markedly QoQ.　　2. Weak sector demand and high costs dragged earnings. Given the weak macro demand in 3Q22, product prices in the sector barely increased. Meanwhile, considering the high raw material costs (Sun Paper’s self-sufficiency rate for pulp was over 50% and it needed to purchase pulp externally at high prices), we think meager earnings from printing and writing (P&W) paper and containerboard dragged the firm’s earnings growth.　　3. Stable profit margin outperformed peers. In 3Q22, Sun Paper’s GM and net profit margin were 14% and 6%, thanks to the firm’s integrated forest-pulp-paper capacity and diversified category mix, implying stronger anti-risk capabilities and cost advantages compared with its peers.　　4. Net profit to cash flow ratio at 141%. In 1-3Q22, the firm’s operating cash flow totaled Rmb3.2bn,　　Trends to watch　　Falling demand for dissolving pulp; production bases in Laos and Beihai to contribute to growth. We believe the prices of dissolving pulp have fallen about Rmb1,000/t from the high in August, and it may be hard for dissolving pulp to deliver robust earnings in 4Q22 as in 1H22. Recently, companies raised product prices of P&W paper amid a traditional peak season, with the profit margin likely to improve QoQ in 4Q22.However, given high pulp prices and weak papermaking demand, we see challenges for the firm’s overall profit margin to recover QoQ in 4Q22.　　Looking ahead, we expect the high-end containerboard produced in Laos to become an important growth driver for the firm’s earnings in 2023, thanks to the declining price of US old, corrugated cardboard (OCC) and the weak impact of COVID-19 in Laos. In addition, the firm expects a 100,000t/yr household paper production capacity to go online in Beihai in 2H22, and we estimate the sales volume may increase over 3% in 2023. Nevertheless, if pulp prices continue to drop and papermaking demand remains tepid, paper prices and the profit margin of pulp sold may further decline, weighing on full-year earnings, in our view.　　Advancing forest-pulp-paper integration; production facilities in Nanning, Guangxi to boost medium-term growth. Sun Paper has more than 5mnt paper and pulp capacity, and over 70,000 hectares of forest land in Laos. Moreover, the firm is expanding capacity despite the industry downturn. It announced plans to build a 5.25mnt/yr forest-pulp-paper integrated project in Nanning.　　We believe the capacity expansion in Guangxi is conducive to reducing labor and land costs, as well as promoting the forest-pulp-paper integration. The firm’s total production capacity for paper and pulp will amount to over 15mnt/yr once the Nanning project starts operation as scheduled. In the medium term, we think high-quality fiber and regional resources close to ports are likely to become rarer in the industry. We believe the firm enjoys strong competitive advantages in geographic location, forested land resources in Laos, high-quality fiber, and a diversified product mix.　　Financials and valuation　　Given weak papermaking demand and falling demand for dissolving pulp, we lower our 2022 and 2023 net profit forecasts 20% and 28% to Rmb2.8bn and Rmb2.9bn. The stock is trading 11x 2022e and 11x 2023e P/E. Maintain OUTPERFORM. We roll over valuation to 2023e and maintain our target price at Rmb16 (15x 2023e P/E), offering 37% upside.　　Risks　　Sharper-than-expected raw material and energy price hikes; demand falls short of expectation; faster-than-expected commissioning of new 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。

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