Matters: The company released its 2018 three-quarter report: the first three quarters achieved operating income of 15.80 billion yuan, an increase of 17.9% over the previous year; net profit of 1.28 billion yuan, a year-on-year increase of 28.2%. Among them, the third quarter achieved operating income of 5.72 billion yuan, up 13.4% year on year, up 1.3% month on month; net profit of 528 million yuan, down 10.6% year on year and 6.9% month on month. Earnings per share for the first three quarters were $0.46, and net assets per share were $2.72. Ping An's view: Overall operations in the first three quarters remained stable: the company's production and sales volume in the first three quarters reached 4.1696 million tons and 4.1576 million tons, up 4.76% and 3.33%, respectively; the average prices of the main products, profiles, strips, and pipes in the first three quarters reached 3556.00 yuan/ton, 3502.44 yuan/ton, and 3975.25 yuan/ton, respectively, up 15.07%, 15.51%, and 18.81%, respectively, reflecting a sharp rise in the company's overall operating volume and price in the first three quarters. The main factor behind the increase of 28.2% over the previous year. Gross margin declined year on year, and single-quarter results for the third quarter declined year on year: gross margin for the third quarter was 16.7%, down 3.0 percentage points year on year; net profit was 528 million yuan, down 10.6% year on year. The reasons for the analysis are mainly due to rising costs and expenses: (1) Judging from the cost of the main raw materials, it is mainly that the large increase in coke prices has eroded the company's profits. According to the Steel House Coke Index, the average price of coke in Northeast China in the third quarter of 2018 was 2354.71 yuan/ton, an increase of 374.37 yuan/ton over the same period, an increase of 18.90%, exceeding the steel price index (MySPIC Index: Northeast) by 10.55 percentage points; while the price of Pratt's iron ore during the same period was 66.68 US dollars/ton, down 5.95% year on year. Since the cost of iron ore and coke accounts for the main part of the cost of steelmaking pig iron, it can be determined that the rapid rise in coke prices is the main reason for the increase in costs. (2) The year-on-year increase in expenses during the period also eroded the company's performance. The company's expense ratio for the third quarter was 3.3%, up 0.2 percentage points from the previous year. Among them, the sales expense ratio, management expense ratio, and financial expense ratio were 1.4%, 1.2%, and 0.8%, respectively, the same as the previous year, 0.1, and 0.1 percentage points, respectively. Management expenses for the third quarter were 71 million yuan, an increase of 16 million yuan over the previous year; financial expenses for the third quarter were 43 million yuan, an increase of 108 million yuan over the previous year. According to the semi-annual report, the increase in management expenses should be mainly due to an increase in employee remuneration; combined with the financial statements for the third quarter, the increase in financial expenses should be mainly a decrease in interest income and an increase in discount expenses on acceptance bills. Close to environmentally friendly production restrictions during the heating season, it is still expected to maintain high performance in the fourth quarter: the scope of production restrictions during the 2018 heating season was further expanded, extending from the surrounding area of Beijing-Tianjin-Hebei to the Yangtze River Delta region and the Fenwei Plain. On the other hand, in the context of heightened external trade frictions, active fiscal policies are expected to stabilize infrastructure growth, and the infrastructure shortfall compensation policy is expected to gradually show results in the fourth quarter. As the closest listed steel company to the Beijing-Tianjin-Hebei environmental production limit area, the company is not included in the production restrictions. It is expected to benefit fully, and the fourth quarter results are still expected to maintain a high level of performance. Profit forecast and investment recommendations: The company is expected to achieve net profit of 1,681 billion yuan, 1,772 billion yuan and 1,838 billion yuan respectively in 2018-2020. The corresponding EPS forecasts are 0.61 yuan, 0.64 yuan and 0.66 yuan respectively, and the PE corresponding to the closing price of October 9 is about 5.8 times, 5.5 times, and 5.3 times, respectively. We believe that the company is close to the environmental production restricted area in the north and directly benefited from production restrictions in the northern region in the fourth quarter. Performance is still expected to continue to grow and maintain the “recommended” rating. Risk warning: 1. The implementation of environmental production restrictions fell short of expectations. If the implementation of the environmental production limit policy in the fourth quarter falls short of expectations, it will have a significant adverse impact on the industry and the company; 2. Steel demand fluctuates more than expected. If the economy declines further in the fourth quarter, steel demand may decline, leading to falling steel prices, which will affect the company's performance; 3. There is a risk that raw material prices will rise too fast. The excessive rise in raw material prices has caused the production costs of steel mills to rise, eroding corporate profits and limiting the rise in industry prosperity.