Nine Dragons Paper's annual profit doubles, but shares fall nearly 30% on expectation gap

Stock Plunges Nearly 30% Despite Strong Earnings Growth

Over the past month, shares of Nine Dragons Paper (02689) have experienced a dramatic downturn. After hitting a session high of HK$8.43 on August 10—marking a near-term peak—the packaging paper leader's stock has been on a steady decline, closing at HK$5.93 on September 23, representing a cumulative drop of nearly 30%.

Notably, this sell-off occurred even after the company issued a positive profit alert. On the day of the announcement, Nine Dragons Paper's share price reversed gains in the afternoon session, ultimately closing down 16.8%. Although the stock staged a brief rebound in the following days, the recovery proved short-lived before the downtrend resumed.

Financial Performance Shows Clear Improvement

According to the company's fiscal 2026 results for the year ended June 30, 2026:

• Revenue: RMB 75 billion, up 18.6% year-on-year
• Net profit attributable to shareholders: RMB 3.581 billion, up 102.6% year-on-year

With the Mid-Autumn Festival and National Day holidays approaching—the traditional peak season for the paper industry—Nine Dragons Paper's six major production bases have recently issued price hike notices. Corrugated paper and kraft linerboard prices will increase by RMB 50 per tonne, with the adjustments taking effect after October.

Against the backdrop of seasonal price increases and persistent short-term capital outflows, the key question for the market is whether these strong results can provide support for the stock price.

Market Divergence Persists as Stock Searches for Bottom

The trading action on the day of the profit alert offers critical insight into Nine Dragons Paper's recent trajectory. On August 20, the stock reversed sharply in the afternoon session, closing down 16.8% and wiping out over HK$6 billion in market capitalization in a single day.

Trading volume surged to HK$751 million, with a turnover rate of 2.31%—significantly above the stock's average daily trading level over the past year—indicating decisive capital outflows. While the stock rebounded in subsequent sessions, volume failed to sustain, and the rebound momentum weakened progressively before the stock entered a new downtrend, hitting a fresh near-term low on September 23.

Why Did the Market Reject the Profit Alert?

According to a UBS report, the core reason lies in expectation gaps. After the profit alert, UBS communicated with onshore investors and learned that some had anticipated earnings to exceed guidance by approximately 10%. As a result, the net profit range of RMB 3.9–4.1 billion was viewed as "below expectations."

However, this expectation adjustment likely reflects short-term capital behavior rather than a否定 of the company's fundamental trends. From a valuation perspective, the stock's forward P/E ratio has fallen below 7x, near historical lows, suggesting the emotional impact of the profit alert has been largely priced in.

Peak Season Price Hikes Underway

With the Mid-Autumn Festival and National Day holidays approaching, the traditional peak season for the paper industry has arrived as expected. Nine Dragons Paper's six major bases have issued密集 price hike notices, raising corrugated paper and kraft linerboard prices by RMB 50 per tonne, effective after October.

Brokerage research notes indicate that the combination of peak demand in Q4 and cost-side support creates a favorable short-term outlook for boxboard and corrugated paper price increases.

Industry Dynamics

Among paper segments in the current expansion cycle, boxboard and corrugated paper have shown the strongest景气度. Since 2025, cultural paper and white cardboard prices have continued to bottom out, while boxboard and corrugated paper have benefited from better supply-demand dynamics and cost support, with prices showing a gradual recovery from the bottom.

Current industry inventory levels are relatively low. If demand recovers moderately during the peak season, inventory replenishment and demand could create a positive共振.

From a medium-term perspective: If peak-season price hikes are successfully implemented and transmitted to the profit side, combined with cost savings from pulp-paper integration, the company's valuation may have room for recovery.

Earnings Improvement Trend Is Clear

Nine Dragons Paper's fiscal 2026 results show:

• Sales volume: Up 14% year-on-year to approximately 24.5 million tonnes, hitting a record high for the fourth consecutive year
• Average selling price: Up approximately 4% year-on-year despite market headwinds
• Revenue: Up nearly 20% to RMB 75 billion, driven by both volume and price increases

Profitability Enhancement

Alongside scale expansion, Nine Dragons Paper's profitability has also improved:

• Gross profit: Up 50.8% to RMB 10.925 billion
• Gross margin: Rose to 14.6%, an increase of 3.1 percentage points

The improvement was driven by product price increases outpacing raw material cost increases, combined with cost savings from pulp-paper integration. Net profit attributable to shareholders doubled during the period.

Capital Expenditure Shift Upstream

With significant profit improvement, Nine Dragons Paper's capital expenditure focus is shifting toward upstream raw materials. According to the annual report, the company is advancing fiber and paper production capacity construction in:

• Jingzhou, Hubei
• Chongqing
• Tianjin
• Beihai, Guangxi
• Dongguan, Guangdong
• Taicang, Jiangsu

These projects involve:

• Annual fiber design capacity: approximately 3.8 million tonnes
• Annual paper design capacity: approximately 3.2 million tonnes

Upon completion, total annual design capacity for wood pulp will exceed 8.5 million tonnes, significantly提升 raw material self-sufficiency and laying the foundation for continued realization of the pulp-paper integration strategy.

Outlook: Valuation Compression vs. Fundamental Improvement

The nearly 30% decline over the past month has already reflected, to some extent, the market's adjustment of expectations following the profit alert and cautious观望 regarding the effectiveness of peak-season price hikes.

Nine Dragons Paper's full-year results clearly demonstrate substantial improvement in earnings quality:

• Gross margin up 3.1 percentage points
• Net profit doubled
• Pulp-paper integration entering the harvest phase

Key observation: The valuation compression caused by short-term capital outflows has created a divergence from the ongoing improvement in fundamentals. If Q4 peak-season price hikes are successfully transmitted, combined with cost savings from improved raw material self-sufficiency, Nine Dragons Paper could see dual recovery in both earnings and valuation.

For investors, the stock's current valuation is near historical lows. Once subsequent paper price trends and inventory destocking confirm the strength of the peak season, the company's investment value may warrant renewed attention.