Summary of this issue:
Infrastructure construction and environmental protection normal production limit work together on steel prices. In the second half of 2019, the implementation of ultra-low emission standards and the implementation of "normalized" environmental protection production restriction policy in the iron and steel industry will make the steel market in the supply and demand structure of "weak supply" for a long time. At the same time, the issuance of bonds by urban investment companies, the full liberalization of IPO and the implementation of local government special debt issuance policies will effectively stimulate local infrastructure investment, thus increasing the demand for steel. We expect that the imbalance between supply and demand will keep steel prices relatively stable in 2019.
The company's location advantage is obvious, and the downstream demand can be expected in the future. Chongqing and Sichuan are provinces with a net inflow of steel, with an annual steel gap of about 21 million tons. With the increasing investment in infrastructure in the western region in the future, the construction materials used in the field of infrastructure construction are marketable and highly meet the downstream needs of high-quality products. Through the adjustment of product structure in 2018, the company effectively increased the proportion of construction materials such as bar and wire rod, and cut into the demand gap of steel for infrastructure construction in Chongqing and Sichuan.
The cost of steel per ton of the company is lower than the industry average. The total cost of Chongqing steel per ton of steel is about 2973.81 yuan. Among them, iron ore-based raw materials account for about 60%, energy, labor and processing costs account for about 35%. We selected the average cost per ton of steel of listed companies in A-share Pu steel industry to compare. The average cost per ton of steel in 2018 was 3827.65 yuan per ton, while that of Chongqing steel was lower than the industry average of 853 yuan.
Profit forecast and investment rating: Chongqing and the surrounding Sichuan area is a net steel inflow province, with an average annual steel shortfall of about 21 million tons.
Chongqing Iron and Steel, as the main steel production capacity along the Yangtze River in the western region, has obvious location advantages. At the same time, after the adjustment of product structure in 2018, the output of construction materials has increased, benefiting from the "western development" and "Belt and Road Initiative" construction policy, the products are marketable and the downstream demand can be expected. In addition, from the cost ranking of comparable companies in the same industry, the complete cost per ton of steel in Chongqing is lower than the industry average. We estimate that the diluted EPS of the company in 2019-21 is 0.17,0.22,0.29 yuan respectively. We select A-share steel industry listed companies for comparison, considering the location advantages of the southwest region where the company is located and the company cost in the first echelon in the industry, the current valuation is lower than the industry average, give the company "overweight" rating.
Stock price catalyst: the development of the western region and the "Belt and Road Initiative" construction policy pull up the infrastructure construction in Chongqing and its surrounding areas; the price of iron ore raw materials falls.
Risk factors: Sino-US trade frictions bring uncertainty to the domestic macroeconomic trend, steel product exports, energy prices and exchange rate; the growth rate of fixed asset investment continues to decline; backward production capacity such as strip steel resumes production; steel prices go down further; Chongqing will strengthen production restrictions on environmental protection in the future.