Event: on April 11, 2017, Xining Special Steel released its annual report that the company achieved operating income of 7.39 billion yuan in 2016, an increase of 22.08% over the same period last year, and a net profit of 69 million yuan for shareholders belonging to the parent company, an increase of 104.29% over the same period last year.
Comments:
Benefit from the production capacity of steel prices rise, the company's performance turned from deficit to profit. Steel prices rebounded sharply in 2016 after successive declines in previous years. China's steel production capacity was reduced by 65 million tons in 2016, exceeding the target of eliminating production capacity. The reduction in production capacity has had a positive impact on steel prices. In 2016, the Myspic composite steel price index rose from 74.54 points at the beginning of the year to 127.74 points at the end of the year. The prices of major products such as cold rolling, hot rolling, rebar and wire rod rose by more than 50 per cent for the whole year. Benefiting from the impact of capacity loss, the company's annual sales increased significantly compared with the same period last year, and its performance turned from deficit to profit. Thanks to the company's excellent cost control ability, the unit cost of major products decreased in 2016 compared with the same period last year: the manufacturing cost per ton of steel decreased by 217 yuan / ton, the complete cost of iron powder decreased by 37.68 yuan / ton, and the complete cost of coke decreased by 24 yuan / ton. Under the dual effect of rising prices and falling costs, the gross profit margin of the iron and steel industry increased by 18.42 percentage points year-on-year to 6.90%, the gross profit margin of the coal industry increased by 11.97 percentage points to 11.11%, and the company's comprehensive gross profit margin increased by 14.95 percentage points to 12.67%.
Raise funds to reduce the level of balance sheets. The company completed a non-public offering of 303.899 million shares in November 2016, raising 1.75 billion yuan, and the asset-liability ratio decreased from 92.84% in 2015 to 86.73% in 2016. The financial expenses of the company from 2014 to 2016 were 606 million yuan, 592 million yuan and 555 million yuan respectively, and the total profits of the company in the same period were 214 million yuan,-1.741 billion yuan and 94 million yuan respectively. According to the plan, all the funds raised will be used to repay bank loans. Based on the current average interest rate of about 6.30% of the company's bank loans, the company can reduce the interest expenses by about 110 million yuan per year. Generally speaking, this non-public offering optimizes the company's asset structure, reduces the level of assets and liabilities and financial risks, and improves the company's profitability.
Unique location advantage, share Belt and Road dividend. Xining, which is close to southern Xinjiang and Tibet, is located in an important area of "Belt and Road Initiative" and has unique regional advantages. With the release of the work plans of the governments of Xinjiang and Tibet in 2017, the two places will invest heavily in the construction of roads, railways, airports and other infrastructure this year. In 2017, investment in fixed assets in Xinjiang reached more than 1.5 trillion, of which investment in highway construction reached 200 billion. Investment in fixed assets in Tibet will also reach about 200 billion, an increase of 20 percent over the same period last year. The development of Xinjiang and Tibet and its leading Belt and Road will boost steel demand in the western region, and the company, as the steel leader in the northwest, is expected to benefit from policy dividends and achieve performance growth.
Profit forecast and rating: based on the company's current equity, we expect the company to achieve EPS of 0.10,0.11,0.12 yuan in 17-19, corresponding to PE of 62, 55 and 51 times, respectively, according to the closing price of 2017-04-11, maintaining the "overweight" rating.
Risk factors: downstream demand for special steel products slows; prices of raw materials such as iron ore and coke rise sharply; anti-dumping investigations in overseas countries affect the export of special steel products; bank loan restrictions lead to increased financial pressure.
