Izqfinancieras APP learned that Guosen Securities issued research reports stating that since 2024, domestic demand for pulp and paper has been continuously weakening, despite some uplift in pulp prices in Q2 24 due to supply disruptions, the relatively weak demand still puts certain pressure on profit margins. Wood pulp trended stronger in the first half of the year due to supply disruptions, and with new capacity added in Q3, pulp prices fell back. The future outlook lacks a strong foundation for growth. The core of profitability in finished paper lies in cost control ability in a weak demand environment. With the effectiveness of domestic policy stimulus and overseas entry into an easing cycle, pulp and paper demand is expected to warm up with the recovery in consumption.

Guosen Securities' main points are as follows:

Wood pulp: The trend was stronger in the first half of the year due to supply disruptions, with pulp prices falling back in Q3 with the addition of new capacity, lacking a strong foundation for future growth.

In H1 24, pulp prices were mainly affected by overseas supply-side factors (shutdowns, explosions, and delays in the production of Brazilian hardwood pulp, etc.), overall strengthening, but domestic wood pulp is limited by downstream weak demand, insufficient rise in paper prices, leading to a divergence from May and the international market; with light Q3 demand season and new capacity coming online, domestic and overseas pulp prices further fell.

The demand outlook for Q4 peak season remains uncertain, but with the release of 2.55 million tons of capacity from Brazilian Suzano on the supply side, the trend of pulp prices is expected to be volatile, lacking strong support for growth, focusing on disturbances from the supply side; the next major wave of large-scale hardwood pulp capacity additions globally will be concentrated in 2027, with significant supply pressure expected in the future for hardwood pulp.

Finished paper: In a weak demand environment, the core of profitability lies in the ability to control costs.

From the perspective of inventory turnover, the papermaking industry's inventory has entered the active replenishment stage in 2024, but overall demand remains weakly recovering.

Wood pulp sector: Supply and demand as well as prices are relatively stable, high-priced pulp in 2024H1 exerts certain pressure on profits in H2. With demand recovering, there is relatively strong confidence in the profit stability of cultural paper and household paper; Whiteboard due to a more severe oversupply situation and potential competition may weaken the incentive to restore gross margin.

Waste paper sector: Facing greater demand and price pressure, prices in 2024 are already relatively low, and a bottom reversal is expected if structural adjustments and demand improvement occur.

At the company level: Focus on the integrated industry leader who can navigate the cycle and opportunities for bottom improvement.

Bulk paper: Profit recovery in 2024Q1-Q3 but weakening quarter-on-quarter, costs support paper price increases in the wood pulp sector in Q1, but since Q2, the widening gap between raw material costs and paper prices has led to weaker profit quarter-on-quarter, Q3 is under pressure, leading integrated leaders still have excess returns compared to the industry; Waste paper sector demand is not strong, costs and paper prices are in a low consolidation range, profits grind at the bottom.

Specialty paper: In 2024Q1-Q3, due to capacity release and overseas market expansion, leading companies show growth potential; profitability is better than bulk paper, but Q3 profits decline due to the consumption of high-priced pulp inventory.

Investment recommendation: Recommend the leading papermaking giant Shandong Sun Paper (002078.SZ) that combines offense and defense, steadily releases capacity, and strengthens its ability to navigate the cycle through an integrated layout of forestry pulp and paper.

Risk warning: Risks include fluctuations in raw material prices, risks from capacity expansion and intensified market competition, macroeconomic fluctuations, lower-than-expected demand, etc.