1H22 performance is in line with our expectations
The company announced 1H22 results: revenue of 702.9 billion yuan, same/month on month -2.8/ +9.2%, net profit of 1.72 billion yuan, same /month on month -67.1/ +0.1%; 2Q quarterly revenue of 35.37 billion yuan, same /month-on-month -12.7/ +1.3%, net profit of 234 million yuan, same /month-on-month, -93.7/ -84.2%, in line with our expectations.
1) Steel production and sales and gross margin have declined. The company produced 12.67 million tons of 1H22 steel, -7.1/ +13.5% over the same period; achieved steel sales of 1.03 million tons, -3.6/ +19.8% over the same period. Affected by adverse factors such as the epidemic, smog and haze production limits, and falling market demand, compounded by the Russian-Ukrainian conflict, the price of raw fuel rose after the Russian-Ukrainian conflict. Although 1H22's steel sales price increased year on year, production, sales and profitability both declined. We estimated that the company's 1H22 tonnes of steel sold at 5380/5099/281 yuan, respectively, +55/+409/-354 yuan, and -504/-377/-127 yuan. 2) Expenses remained stable during the period, and operating cash flow was under pressure. Faced with market pressure in the first half of the year, the company actively promoted cost control and fee reduction. The overall cost rate for 1H22 comprehensive tonnes of steel remained stable. The cost rate for 1H22 comprehensive tonnes of steel was the same, 7/-11 yuan to 96 yuan/ton, the cost rate for the 2Q22 period was 2.6%, and the same /month-on-month average was +0.4ppt. Among them, the management fee rate was the same/month-on-month ratio -0.1/+0.1 ppt to 1.0%, and the financial cost rate was the same/month-on-month ratio +0.3/+0.2ppt to 0.5%. Due to a decrease in sales volume and an increase in accounts receivable, the company's 1H22 operating cash flow was -52.3% year-on-year to 4.14 billion yuan. 3) Asset quality remains stable. As of 1H22, the company's balance rate/net debt ratio was 37.4/2.5%, +1.3/-1.0ppt year on year, and remained stable overall. Furthermore, the company's 1H22 asset/credit impairment losses were -1.4/-210 million yuan year-on-year, mainly due to inventory price reduction preparations/accounts receivable credit impairment preparations.
Development trends
Peak season replenishment is expected to drive a rebound in steel prices. We are optimistic that the company's profit will recover in the second half of the year. Judging from recent high-frequency data, demand has not deteriorated further under the influence of hot weather: since August, the apparent weekly consumption of the five major steel varieties has averaged 9.61 million tons, and round/year over year -1.7/ -6.3%. Looking ahead to the peak season, although the inflection point for the commencement of real estate construction has not yet been reached, the weakening impact of the weather and the pandemic may release demand for rush work, and we expect demand to improve marginally. Furthermore, we believe that the inventory cycle's supporting effect on subsequent steel prices may exceed market expectations: social inventories have been removed for 10 consecutive weeks. Currently, the total inventory of the five major types of steel has dropped to 16.29 million tons, which is -6.5% compared to the average for the same period in the past 6 years. Coupled with low inventories, marginal improvements in demand during the peak season may further enable terminal manufacturers to actively replenish stocks, and bring about a simultaneous rise in steel prices/profits. As a leading steel enterprise in Northeast China, the company is optimistic that profits will recover in the second half of the year.
Profit forecasting and valuation
Due to the lower steel gross margin assumption, we lowered 22/23e EPS -26.8/ -13.7% to 0.38/0.52 yuan. The current A/H shares correspond to 2022/2023e 8.0 x/5.8 x P/E and 5.8 x 4.2 x P/E, respectively. We believe that due to the improving sector in line with demand during the peak season and the company's expected valuation repair, we maintained the company's neutral rating and lowered the A/H target price by 13.2%/14.3% to $3.30 (corresponding to 2022/2023e8.8x/6.4x P/E) /2.82 HKD (corresponding to 22/23e 6.4x/4.6x P/E), with A/H shares implying 10%/10% upside.
risks
The development of the epidemic has exceeded expectations; the decline in the real estate boom has exceeded expectations.