Event: The company released financial results for the first quarter of 2022 & 2023

Performance growth exceeded expectations. On April 29, 2023, China Steel Tianyuan released its 2022 annual report and the first quarter report of 2023. In 2022, the company achieved revenue of 2,762 million yuan, an increase of 5.70% over the previous year; net profit of the mother was 399 million yuan, an increase of 80.75% over the previous year; after deducting net profit of the non-return mother was 337 million yuan, an increase of 94.58% over the previous year. In the first quarter of 2023, the company achieved revenue of 607 million yuan, a year-on-year decrease of 12.69%; net profit of Guimu was 56 million yuan, a year-on-year decrease of 8.53%; net profit of non-return mother was 44 million yuan, a year-on-year decrease of 0.55%.

The inspection and testing business developed and expanded to advance the high-end testing field

The company is one of the authoritative inspection and testing institutions in the field of major domestic infrastructure. Thanks to the company's active business expansion, the inspection and testing business is growing steadily and rapidly. In 2022, the company's inspection and testing business contributed 568 million yuan to revenue, up 26.41% year on year, accounting for 20.57% of total revenue; its gross profit was 322 million yuan, up 44.56% year on year, accounting for 49.09% of total gross profit; gross profit margin was 56.63%, up 7.09pct year on year.

There are a wide variety of magnetic materials and battery material products. The company's soft magnetic materials and device products, which are in high downstream demand, include manganese tetroxide, ferrosilicon powder, iron silicon powder, iron silicon aluminum powder, manganese-zinc/nickel-zinc ferrite, transformers, etc., which are widely used in the production of soft magnetic ferrite and soft magnetic metal magnetic powder cores. The target market for high-performance soft ferrite cores covers emerging application fields such as 5G communications, automotive electronics, and photovoltaic new energy, and has broad market prospects; metal soft magnetic powder cores are the core material for manufacturing inductive components, and their terminal application fields such as photovoltaics, new energy vehicles, and energy storage are developing rapidly.

In addition, battery-grade manganese tetroxide is an important raw material for lithium manganate and lithium manganese-ferrophosphate. It is also widely used in new energy vehicles, photovoltaics and other fields and functional materials such as optical glass and pigments, with a strong development trend. China Steel Tianyuan is a major manufacturer of high-purity manganese tetroxide in the world. By the end of 2022, the construction of its battery-grade manganese dioxide production line with an annual output of 10,000 tons had completed the installation of main equipment and trial production and commissioning, with good results.

In the future, the company will further expand its permanent magnet ferrite business, rare earth permanent magnet business, and soft magnet business, and build 3 industrial clusters above 1 billion by 2025. Among them, the production capacity of permanent magnet ferrite devices is planned to reach 40,000 tons, the production capacity of rare earth permanent magnet components is planned to reach 10,000 tons, and soft magnetic ferrite devices are planned to reach 20,000 tons.

The restructuring of Baowu Steel and China Steel Group brought industrial synergy advantages. On December 21, 2022, according to the restructuring plans of China Baowu Steel Group and China Steel Group, Baowu China Steel Group was officially integrated into Baowu as a whole.

As a high-tech enterprise providing comprehensive solutions and industrial ecosystem services for steel and advanced materials, Baowu Group is expected to provide the company with more industrial resource support in the future to accelerate the company's development. Baowu Group is the largest steel company in the world and is expected to provide the company with high-quality iron red. Baowu's new materials business segment can intersect with the company's magnetic materials in many fields, and can exert industrial synergies.

Profit forecasting

The company is expected to achieve operating income of 33.02/40.89/4,862 billion yuan (23/24E reduction) in 2023/2024/2025, up 19.54%/23.84%/18.90%, respectively; the net profit of the mother is 437/577/670 million yuan (23/24E down), up 12.16%/31.87%/16.29%, respectively, and the corresponding EPS is 0.58/0.76/0.88 yuan respectively.

Based on the closing price of 9.45 yuan on April 28, 2023, the corresponding PE corresponding to 2023-2025E was 16.41/12.44/10.70 times, respectively. Maintain a “buy” rating.

Risk warning:

Macroeconomics fell short of expectations; downstream demand fell short of expectations; capacity construction fell short of expectations.