Abstract: Xiwang Special Steel earlier announced a 17-year mid-term profit forecast, according to the announcement, the net profit is expected to reach about 300 million yuan. Management believes that profitability in the second half of this year should be at least similar to that in the first half, which represents a full-year net profit of about Rmb600m. The company's 2017 price-to-earnings ratio is 4 times, and the price-to-book ratio is 0.6 times. In terms of price-to-earnings ratio and price-to-book ratio, the company discounts 61% and 43% compared with its major peers, respectively. We see the following two main catalysts that will help narrow the valuation gap: (1) steel prices are expected to remain strong during the peak season in September and October; and (2) if Qixing Group completes its bankruptcy restructuring, it will eliminate the uncertainty about Xiwang Special Steel's parent company.
Mid-17-year net profit increased by 80% over the same period last year. 90%. The company issued a profit forecast in mid-July and expects a mid-17-year net profit of about 300 million yuan, according to the announcement. The strong growth during the period was mainly driven by a simultaneous increase in gross profit per ton of ordinary steel and special steel.
Management is confident that profitability will be maintained in the second half of the year. Due to fewer holidays in the second half of the year (compared with the first half) and the acceleration of construction activity in the third and fourth quarters, management expects that the net profit in the second half of the year will not be lower than that in the first half, especially since the overall inventory of the industry is still low. The company said that the industry began to enter the peak season at the end of the third quarter, which should also be conducive to steel price performance.
The gross profit per ton is expected to be maintained at about 500 yuan / ton. In the first half of 17 years, the company's gross profit per ton was about 500 yuan per ton, and the management expected the level to be similar in the second half of the year, because the gross margin per ton of ordinary steel has a good prospect. Xiwang Special Steel, as a small company in the industry, its capacity utilization is close to 100% (the corresponding annual output is about 3 million tons, the utilization rate is much higher than the industry average of more than 60%).
The impact of environmental inspections is limited. Xiwang Special Steel has spent about 800 million yuan on environmental protection-related facilities, so it is expected that the environmental inspection initiated by the government will not affect the company's production. However, environmental inspection may lead to the suspension of production in other industries, which will benefit Xiwang Special Steel.
Waiting for Qixing Group to complete its bankruptcy reorganization. Qixing Group is a company focused on aluminum products, and the company is in financial difficulties because of its high debt ratio. Xiwang Group, the parent company of Xiwang Special Steel, has participated in some joint guarantees; if the responsibility of the guarantee is to be fulfilled, the potential net burden is about 870 million yuan. By the end of September 2016, Xiwang Group had a net asset value of about 14.7 billion yuan and a cash and bank balance of about 2.7 billion yuan. This means that even if the worst comes to the worst, Xiwang Group's financial position is still sound. At present, Qixing Group has entered the bankruptcy reorganization process. The local government has indicated that it will support the development of Xiwang Group in the bankruptcy process.
Review: the new production line will drive growth beyond 2018. The company announced that it will invest 2.55 billion yuan to set up a new production line, which can produce 700000 tons of rails, 150000 tons of railway axle billets and 150000 tons of section steel every year. According to management estimates, the annual revenue contribution of the production line is about 5 billion-6 billion yuan. The first phase is expected to be completed by the end of 2018 and the second phase by 2020.
There is a big discount compared with the same industry. The company now trades at 4.9 times 2017 earnings (consensus forecasts seem conservative if management targets are taken into account), well below 15 times for 0347.HK and 10 times for 0323.HK. The valuation gap is more than 50%, but we see the following two main catalysts, which we believe will help narrow the valuation gap: (1) steel prices are expected to remain strong during the peak season in September and October; and (2) if Qixing Group completes its bankruptcy restructuring, it will eliminate uncertainties about Xiwang Special Steel's parent company.
Company background: Xiwang Special Steel is an iron and steel producer, and about 75% of its revenue in 2016 came from Shandong. The company also produces general steel and special steel. Last year, the company sold 2.8 million tons of steel products (compared with 19.9 million tons in Angang in 2016). Xiwang Investment holds a 74.75% stake in the company.