Introduction to this report:

The company's performance in 2022 fell slightly short of expectations. The company's production and sales scale increased steadily in 2022, but the decline in steel prices affected the company's short-term profit level. The company's profit level is expected to pick up again in 2023 as downstream steel demand gradually recovers.

Key points of investment:

Maintain an “increase in holdings” rating. In 2022, the company achieved revenue of 131,072 billion yuan, a year-on-year decrease of 3.71%; its net profit was 156 million yuan, a year-on-year decrease of 97.76%, and the performance was slightly lower than expected. The 2023-2024 EPS forecast was maintained at 0.09/0.19 yuan, and the 2025 EPS forecast was increased by 0.27 yuan, corresponding to net profit attributable to the mother of 800/1,743/2,519 million yuan. However, considering the valuation restoration, reference is that similar companies gave the company 0.55 times PB valuation in 23 years, raised the target price to 3.42 yuan (originally 3.18 yuan) to maintain the “increase in holdings” rating.

The scale of production and sales has been growing steadily, and falling prices have an impact on short-term profits. In 2022, the company's steel production and sales volume were 2,508 and 25.82 million tons respectively, up 1.14% and 5.83% respectively; while the price of steel was 5065 yuan/ton, down 9.14% from the previous year; the cost of a single ton of steel was 4,947 yuan/ton, down 1.85% from the previous year. The drop in product price was greater than the drop in cost per ton, squeezing the company's profit margin: in 2022, the company's gross profit per unit of product was 118 yuan/ton, down 78% from the previous year. As steel demand recovers in 2023, the company's profit level is expected to pick up again.

Continue to dig deeper into cost reduction potential and improve production efficiency. In 2022, the company's steel sales, management and financial expenses were 23.24, 50.28, and 18.86 yuan/ton respectively, down 4.85%, 15.92%, and 6.07% from the previous year; the company's comprehensive material ratio was 94.2%, a further increase of 0.2 percentage points over the previous year. The company insists on digging deeper into cost reduction potential and continuously improving its own production efficiency.

Continuously optimize the product structure, and many products have achieved new breakthroughs. The proportion of the company's leading products in 2022 was 38.6%, an increase of 2.6 percentage points over the target value. The company achieved new breakthroughs in the production and sales of a number of products, including: 4 products including high toughness bridge steel with low bending strength ratio; new breakthroughs in sales of zinc, aluminum and magnesium products for photovoltaics; sales of oriented silicon steel reached a record high; development of high-magnetic unoriented silicon steel achieved new results and was recognized by customers, etc., and the competitiveness of the company's products continued to increase.

Risk warning: The recovery in downstream steel demand fell short of expectations; raw material prices have risen sharply.