Description of the event: On March 28, the company released its 2022 annual report: in 2022, the company achieved revenue of 70,667 billion yuan, a decrease of 7.69% over the previous year; net profit of the mother was 2,161 million yuan, a decrease of 48.6% over the previous year; after deducting net profit of 2,029 billion yuan from the previous year, a decrease of 45.01% over the previous year. 2022Q4, the company achieved revenue of 18.022 billion yuan, an increase of 7.67% over the previous year and an increase of 1.5% over the previous year; the net profit of the mother was 85 million yuan, a decrease of 84.9% over the previous year and a decrease of 85.5% from the previous month; after deducting net profit of the non-return mother, a decrease of 95.9% over the previous year and a decrease of 96.4% from the previous month.

Comment: Product sales and gross margin both declined year-on-year

① Volume: Total production and sales declined year on year, and the volume and price of advanced steel materials rose sharply. In 2022, due to the impact of blast furnace overhauls and furnace maintenance, the company achieved a total production of 9.844,300 tons of steel such as plates, pipes, bars and wires, a year-on-year decrease of 5.37%, and total sales of 9.751 million tons, a year-on-year decrease of 6.28%. Among them, sales of advanced steel materials were 2,065,800 tons, an increase of 14.06% over the previous year, accounting for 21.19% (+3.78pct) of the total sales volume of steel products. The comprehensive average sales price increased 10.49% year on year, and the total gross profit was 2,141 billion yuan, an increase of 14.06% over the previous year.

② Price: The company's gross margin decreased slightly by 0.93pct. Prices of rebar and hot coke in 2022 were -23.97% and -27.71% year on year, iron ore and scrap prices were -24.66% and -7.00% year on year, while the prices of main coking coal and coke were +13.37% and +0.88% year on year, and the price performance was strong. The company's cost reduction and efficiency continued to gain strength. In 2022, procurement costs were reduced by 494 million yuan and process costs were reduced by 1,462 billion yuan. At the same time, thanks to incremental gains in high-value-added products, gross margin fell by only 0.93pct to 10.75%.

③ Expenses for the period increased year-on-year. The company's three fees increased 34.68% year-on-year in 2022, mainly due to the increase in the scale of financing, such as the acquisition of Wansheng shares, Baizhong Environmental Construction, and the construction of Indonesian coke projects.

Core future focus: Actively lay out the upstream industry chain, seize the high-end steel market ① Optimize and upgrade the product structure, and seize the high-end steel market. The company provided high-value-added steel materials for more than 100 “national heavy equipment” and major/key projects. Sales and gross profit of advanced steel materials increased 14.06% in 2022. Furthermore, the company is seizing overseas markets, expanding sales volume and regions of high-value-added varieties, and supplying high-end steel to 37 countries and regions. The company received 980,000 tons of export orders, a record; the increase in exports of high-end steel was far better than that of the industry, providing 650,000 tons of high-end steel for 45 international projects such as the Saudi Aramco oil pipeline and Qatar oil pipeline, an increase of nearly 29% over the previous year.

② The layout revolves around the upstream industry chain. The company built an overseas coke production base in Indonesia and set up a joint venture between Jinrui New Energy (2.6 million tons) and Jinxiang New Energy (3.9 million tons), with a total annual output of 6.5 million tons of coke projects.

In 2022, Jinxiang New Energy achieved 297,900 tons of coke sales, and Jinxiang Renewable Energy is proceeding with on-site construction in an orderly manner.

Profit forecasting and investment suggestions: The company promotes the optimization of the variety structure and deepens the layout of the upstream industry chain. Performance is expected to continue to pick up. We expect the company's net profit to be 26.00/3255/3.682 billion yuan in that order in 2023-2025. Corresponding to the closing price on March 29, PE is 9x, 7x and 6x, maintaining the “recommended” rating.

Risk warning: Prices of raw materials fluctuated greatly, downstream demand fell short of expectations, and production capacity release fell short of expectations.