Event: a few days ago, Xining Special Steel released its annual profit forecast for 2016. the company expects to achieve a net profit of about 6000-90 million yuan belonging to shareholders of listed companies, compared with a loss of 1.619 billion yuan in 2015.
Comments:
Benefit from the production capacity of steel prices rise, the company's performance turned from deficit to profit. In 2016, steel prices opened low and rose high, rebounding sharply after falling 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. Prices of major products such as cold rolling, hot rolling, rebar and wire rods rose by more than 50 per cent for the whole year. Benefiting from the impact of capacity loss, the company's annual sales are expected to increase significantly compared with the previous year, and profitability will also be enhanced accordingly. In the third quarter of 2016, the company's gross profit margin was 9.48%, and with the continued rise in steel prices in the fourth quarter, we expect the gross profit margin to rise further, a significant increase compared to 2015.
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: according to the company's current equity, we expect the company to achieve EPS of 0.07,0.08,0.10 yuan in 16-18 years, corresponding to PE of 90,78 and 59 times respectively according to the closing price of 2017-2-17, 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.
