Introduction to this report:
The company is the most efficient private steel enterprise in China. Its production capacity and output are high. Benefiting from rising steel prices, the company's profits may exceed expectations.
Summary:
The first coverage gave an “increase in holdings” rating. The company is an outstanding private steel company in China. We forecast the company's EPS in 2017-2019 to be 1.03, 1.05, and 1.12 yuan respectively. According to the relative valuation method, the company was given 1.65 PB in 2017, corresponding to the target price of HK$8.50.
Benefiting from rising steel prices, the company's profit may exceed expectations. Supply-side reforms and environmental protection policies have led to a sharp recovery in steel prices. September and October are peak seasons for the steel industry, and demand is expanding seasonally. Under the current tight balance between supply and demand, steel prices may remain strong. The company's high capacity utilization rate and good cost control will fully benefit from rising steel prices, and the company's profits may exceed expectations.
An excellent steel manufacturer with a well-balanced product structure. The company is mainly engaged in the production and sale of steel products. The crude steel production capacity in 2016 was 11 million tons, of which H-shaped steel, strip steel and rebar were produced 325, 438, and 1.71 million tons. Shaped steel and strip steel are the company's main products. The company also produces rebar, and the product structure is relatively balanced. The company's production capacity of 1 million tons of steel sheet piles was put into operation at the end of this year. The company's product structure was upgraded, the profitability of steel sheet piles was relatively good, and the company's profit is expected to continue to increase.
The fee reduction effect is obvious, and the cost control is excellent. The company is focusing on controlling costs. The cost of one ton of steel in 2016 has been reduced from 119 yuan/ton in 2012 to 95 yuan/ton in 2016, and further reduced to 75 yuan/ton in the first half of 2017. The cost reduction supports the continuous increase in gross profit per ton of steel. In 2016, the company introduced ArcelorMittal as a strategic partner. The company's strength grew and its resilience to risks increased.
Risk warning: The macroeconomic downturn is accelerating; the risk of a sharp drop in steel prices; the risk that companies will limit production during the heating season.