Guide to this report:

The company's performance in the first three quarters of 2022 fell short of expectations. As the company's new special steel project is gradually completed and put into operation, the company's product structure will be significantly optimized, and profitability is expected to increase greatly.

Investment points:

Maintain the “increase in holdings” rating. Revenue for the first three quarters of 2022 was 79.3 billion yuan, down 7.6% from the previous year, and net profit for the second half of the year was 664 million yuan, down 90% from the previous year. The performance fell short of expectations. Considering the pressure on both sides of the company's costs and revenue, the 22-24 EPS was lowered to 0.09/0.16/0.26 yuan (originally 0.78/0.82/0.88 yuan), corresponding to 707/12.05/2,019 billion yuan in net profit. Consider block valuation adjustments. Refer to similar companies that gave 0.8 times the PB valuation in '22, lowered the target price to 3.42 yuan (originally 4.59 yuan), and maintain the “increase in holdings” rating.

Short-term performance is under pressure, and it is expected that it will gradually recover in the later stages. Overall demand for steel was weak in '22, and steel prices showed a volatile downward trend; although raw material prices fell somewhat after a sharp rise, the overall drop in raw material prices was lower than the drop in raw material prices, which continued to squeeze the company's profit margin. The company's gross profit per ton of steel in the first three quarters of '22 was 374 yuan/ton, down 48.5% from '21. The company's short-term performance was under pressure. However, we believe that in the context of “steady growth,” steel demand will still be resilient in the later stages, and the company's profit in the steel sector is expected to gradually recover.

The company is recognized as a high-tech enterprise and can enjoy preferential tax policies. On November 10, '22, the company announced that it has been certified as a high-tech enterprise, and that within three years from the certification, the company can enjoy preferential high-tech corporate income tax policies and pay corporate income tax at a rate of 15%. Corporate tax costs will drop significantly from 2022-2024, which will help companies increase profits.

Implement production capacity replacement and steadily advance the construction of new special steel projects. According to the company's announcement, the subsidiary Changjiang Steel transferred 350,000 tons of idle steelmaking production capacity to Baowu, China, the indirect controlling shareholder of the company; at the same time, the company purchased 280,000 tons of steelmaking replacement capacity from Baosteel Special Steel, a subsidiary of Baowu, China, and plans to use it for the 3.2 million ton new special steel project under construction. As the company's new special steel project is gradually completed and put into operation, the company's product structure will be optimized, and profitability is expected to increase significantly.

Risk warning: Downstream demand has dropped sharply; progress of new special steel projects under construction has fallen short of expectations.