Event: Chongqing Iron and Steel released its 2019 semi-annual report on August 16, 2019. During the reporting period, the company achieved operating income of 11.484 billion yuan, an increase of 3.52% over the same period last year, and a net profit of 616 million yuan, down 19.19% from the same period last year.

Comments:

The company has completed the adjustment of product structure, and its production and sales have reached an all-time high. The company's output of iron, steel and timber in the first half of the year was 2.9842 million tons, 3.2506 million tons and 3.0972 million tons respectively, an increase of 199700 tons, 150500 tons and 1303 thousand tons respectively over the same period last year. Steel sales reached 3.1322 million tons, an increase of 188700 tons over the same period last year, the best level in history. In addition, by adjusting the product structure, the proportion of sales of bar and wire products in the first half of the year was significantly higher than that in 2018.

Iron ore prices rose too fast in the first half of the year, resulting in obvious profit erosion effect of the company. In the steel production process, the cost of iron ore as a raw material accounts for 50% of the cost. 55%. In the first half of 2019, due to the rapid unilateral rise in iron ore prices, the price of a ton of iron ore rose by more than 80% at one time, eroding the company's profits by about 367 million yuan.

Profit forecast and rating: according to the company's existing equity, we expect the company's diluted earnings per share in 2019-2021 to be 0.17,0.22,0.29 yuan respectively. Based on the closing price of 2019-08-15, the corresponding PE is 11 times, 8 times and 6 times respectively, maintaining the "overweight" rating.

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.