XIANHE CO LTD(603733)：EARNINGS IMPROVE DESPITE HEADWINDS;NEW PRODUCTION BASE TO CONTRIBUTE INCREMENTAL EARNINGS

Xianhe Co., Ltd. Third Quarter 2025 Financial Performance Analysis

Xianhe Co., Ltd. recently released its financial results for the third quarter of 2025, which align with market expectations and reflect steady growth across key business segments. The company reported a 15.5% year-on-year increase in revenue, reaching Rmb3.07 billion, along with a 13.86% YoY growth in net profit attributable to shareholders, amounting to Rmb304 million. Notably, recurring net profit attributable to shareholders rose by 1.45% YoY to Rmb247 million, driven by government subsidies.

Key Observations and Business Highlights

1. Paper Production and Sales Volume
   The company's paper production and sales volume continued to grow steadily, with estimates of 350,000-400,000 tons for the third quarter. Specialty paper output surged more than 25% YoY to 300,000-350,000 tons, supported by new production bases in Guangxi and Hubei provinces.

2. Self-Produced Pulp Contributing to Profit
   The completion of Phase I projects in Hubei and Guangxi has strengthened the company's integrated pulp and paper production capabilities. During the third quarter, approximately 80,000 tons of pulp were sold in these regions, significantly boosting profit margins.

3. Net Profit Per Tonne Improves Despite Challenges
   Despite headwinds in the paper market, the company's net profit per tonne improved by about Rmb100 QoQ in the third quarter. This growth was attributed to lower-priced pulp and increased utilization of self-produced pulp. However, paper prices are expected to remain under pressure due to weak supply-demand conditions.

4. Stable Performance of Xiawang Subsidiary
   Investment income for the third quarter reached Rmb53 million, with Xiawang's output and sales volume remaining stable at around 80,000 tons. Net profit per tonne exceeded Rmb1,000, reflecting the subsidiary's solid performance.

5. High Capital Expenditure and Financial Position
   The company's net operating cash flow rose by 105% YoY to Rmb919 million in the first three quarters of 2025. Capital expenditure reached Rmb1.40 billion, and the gearing ratio stood at 66%. The firm has plans to raise up to Rmb3 billion via a private placement to fund Phase II construction of the Sanjiangkou New Area project in Guangxi. Monitoring fundraising progress is recommended.

Future Trends and Opportunities

The company is well-positioned to benefit from the integration of pulp and paper production, with key projects in Guangxi and Hubei underway. 2025 is expected to be a pivotal year for production capacity expansion and capital expenditures, with full-year output and sales volume projected to grow by more than 25% YoY. Future efforts will focus on Phase II projects in Guangxi and Hubei, as well as the bamboo pulp project in Sichuan.

The company's strategy to expand product categories, increase capacity, and consolidate its industry leadership position is expected to further enhance cost efficiency and drive long-term growth. However, investors should remain vigilant regarding the cost control of self-produced pulp, given the accelerating capacity expansion in the domestic market.

Financial Valuation and Recommendations

The company's 2025-2026 earnings forecast remains unchanged. The stock is currently trading at 14x 2025e and 12.2x 2026e P/E ratios. We maintain an OUTPERFORM rating with a target price of Rmb25, implying 15.3x 2025e and 13.3x 2026e P/E ratios, offering a 9% upside potential.

Risks and Challenges

Potential challenges include disappointing demand, sharper-than-expected fluctuations in pulp prices, and higher-than-expected new supply. The company's performance will depend on its ability to navigate these risks while maintaining operational efficiency and market leadership.

For further details, please refer to the full report or contact investment research teams for in-depth analysis.