CICC published a research report stating that, considering ND PAPER's (02689) better-than-expected cost advantages from self-produced pulp, the firm has raised its FY25-26 earnings forecasts by 25% and 49% to RMB1.8 billion and RMB2.5 billion respectively, while introducing FY27 forecast of RMB2.5 billion, corresponding to P/B ratios of 0.5x, 0.4x, and 0.4x. The firm maintains its Outperform rating and raises the target price by 33% to HK$6.0, corresponding to P/B ratios of 0.5x, 0.5x, and 0.5x, implying 11% upside potential.

The company released a profit forecast, expecting FY25 earnings of RMB2.1-2.3 billion, up 165%-190% year-on-year. Excluding approximately RMB400 million in perpetual bond interest, net profit attributable to shareholders is expected at RMB1.7-1.9 billion, up 126%-153% year-on-year, exceeding both the firm's and market expectations. CICC believes this is mainly due to better-than-expected cost control from self-produced pulp and declining coal prices.

CICC's main views are as follows:

**FY25 Production and Sales Volume Continue Modest Growth, Product Mix Trending Toward Premium**

The firm estimates the company's paper sales volume in FY25 at over 21 million tons, up 10% year-on-year. Previously, ND PAPER focused on corrugated packaging paper with nearly 30% market share in 2024. In recent years, the company's strategic focus has been on expanding pulp and paper categories and strengthening raw material layout, with vertical integration enhancing excess profits.

According to company announcements, from FY22-25, the company has focused on core bases in Guangxi and Hubei, with expansion centered on pulp and supporting paper production. In FY25, the company commissioned 1.2 million tons of white cardboard, 600,000 tons of cultural paper, 1.75 million tons of chemical pulp, and 600,000 tons of chemi-mechanical pulp. As of FY25, the firm estimates the company's paper and pulp (including recycled pulp) capacity exceeds 23 million tons and 5 million tons respectively, corresponding to 2021-25 capacity growth CAGR of 8% and 30%+.

Looking ahead, the company still plans to commission 1.2 million tons of white cardboard, 700,000 tons of cultural paper, and 700,000 tons of chemi-mechanical pulp in 1HFY26. By the end of 2025, the company's combined paper and pulp capacity will exceed 30 million tons. The firm estimates FY26 sales volume will continue modest growth with further product mix optimization.

**Better-than-Expected Performance Mainly Driven by Cost Decline**

In the first half, the sector experienced weak supply and demand, with average prices continuing to decline across all segments. According to RISI, from January to June 2025, corrugated medium, duplex paper, and white cardboard prices fell 4%, 9%, and 7% year-on-year to RMB3,965/ton, RMB5,695/ton, and RMB4,560/ton respectively.

CICC believes ND PAPER's better-than-expected performance is mainly due to cost decline: first, self-produced pulp cost control significantly exceeded expectations, especially at the integrated Guangxi Beihai base where pulp-paper integration has been perfected, with profit recovery in pulp-paper categories forming the core of this outperformance; second, thermal coal prices declined significantly year-on-year, creating profit space for various paper grades.

Looking ahead, coal prices have recovered notably since the second half of 2025. The firm believes energy advantages may narrow sequentially, with focus needed on tracking profit elasticity from changes in the company's self-produced pulp costs and price increase implementation for some paper grades during peak season.

**FY26 Capital Expenditure May Decline but Remain High, Focus on Debt Ratio Changes**

Since FY22, the company's capital expenditure has entered a new peak period. The company previously announced expected FY25 capital expenditure of over RMB13 billion, with completion of existing capacity planning and construction in 1HFY26. However, considering the company's flexible capacity planning and better-than-expected results from self-produced pulp capacity construction, the firm suggests monitoring ND PAPER's latest commissioning plans. FY26 capital expenditure may still remain at relatively high levels, requiring close attention to debt ratio performance.

**Risk Factors**: Demand falling short of expectations; unexpected volatility in pulp prices; industry supply additions exceeding expectations; company perpetual bond adjustments and high debt ratio.