The company's sales declined sharply in the first half of the year, the product structure was tilted towards the steel sheet pile with high gross profit, and the overall profit level of iron and steel products was in line with expectations. The company's capital expenditure increased significantly in the first half of the year, and it is expected that this year and next year will be a relatively large amount of capital expenditure, and the impact of new equipment on depreciation expenses is expected to begin to appear next year. The company is a leading North China section steel enterprise, affected by the decline in the industry, given a target price of 3.57 yuan, downgraded to "overweight" rating.
Iron ore trade volume greatly increased hedging revenue decline, the profit situation is basically in line with expectations. The company's revenue in the first half of the year was 21.062 billion yuan, down 2% from the same period last year, and its net profit was 1.666 billion yuan, down 43.7% from the same period last year.
The average ton price of the company's steel products was basically the same as in the first half of the year, up 0.62% from the same period last year, and sales fell 18.9% from the same period last year. On the basis of flat prices and a marked year-on-year decline in production, the company's revenue fell only 2% year-on-year, mainly due to a sharp increase in iron ore trade revenue offset by a decline in revenue. The company achieved 4.295 billion yuan in iron ore trade revenue in the first half of the year, an increase of 291% over the same period last year. The company's iron and steel products achieved a gross profit of 460 yuan per ton, down 31.85% from the same period last year. The company's H-beam, strip, cold-rolled and galvanized sheet, billet, rebar, steel sheet pile and other six major products achieved a gross profit of 555 yuan, 464 yuan, 162 yuan, 384 yuan, 189 yuan and 601 yuan respectively in the first half of the year. Among them, the gross profit per ton of cold-rolled and galvanized sheet, billet and steel sheet pile increased by 106 yuan, 142 yuan and 201 yuan respectively compared with the same period last year.
The sales volume declined greatly with the comparison, and the product structure was tilted towards the steel sheet piles with high gross profit. In the first half of the year, the company sold 4.6 million tons of iron and steel products, a decrease of 1.071 million tons compared with 2018H1 and 180000 tons less than 2018H2. The sharp decline in sales of iron and steel products is mainly due to several reasons: first, the company sold its subsidiaries producing and operating in Tianjin and returned the leased plant in Tianjin in the first half of last year, which is estimated to affect the annual production capacity of more than 1 million tons; second, the company has a blast furnace overhauled for several months in the first half of this year, which affects the output of hot metal to a certain extent. The company's sales structure has also been greatly adjusted. Products with large changes in sales include billet, rebar and steel sheet piles, with sales falling by 47.4%, 50.4% and 98% respectively compared with the same period last year.
The reason for the large decline in billet sales is mainly due to the elimination of production capacity in Tianjin, and the decline in rebar sales is mainly due to the worst profitability of rebar in all kinds of products of the company in the first half of the year, and the company adjusted its production structure. more molten steel flows to the steel sheet pile production line with higher gross profit per ton.
Capital expenditure has increased significantly, and the impact on depreciation is expected to begin to show next year. The company's capital expenditure in the first half of the year was 1.97 billion, an increase of about 1.5 billion over the same period last year. The large increase in capital expenditure is mainly due to the company's production capacity and equipment replacement projects and regional railway construction projects. It is expected that the capital expenditure of the two projects will be mainly apportioned in 2019-2020. The depreciation of the company in the first half of the year was 601 million, an increase of 128 million over the same period last year. The increase in depreciation was mainly affected by the replacement of production capacity and equipment. The company adjusted the remaining depreciation life of some replaced production equipment, resulting in an additional depreciation expense of 183 million yuan. In addition, the company's new equipment for capacity replacement is expected to have little impact on depreciation this year, and depreciation provision will mainly start next year, and depreciation for the whole of this year is not expected to increase significantly.
Risk factors: real estate demand declines faster than expected; industry supply exceeds expectations
Investment advice: the pressure of oversupply in the industry this year appears, the rise in the iron ore price center erodes steel company profits, industry profits have fallen to the lowest level since the supply-side reform, and the overall profit center will be lower than last year. The company is a leading enterprise of section steel in North China, and the profitability of section steel products is strong and tough. Taking all things into consideration, we have lowered our 2019-20 EPS forecast to 0.76 EPS 0.82 yuan (corresponding to HK $0.83 0.90, compared with the original forecast of HK $1.55 0.46), and added a new 2021 EPS forecast of 0.88 yuan (corresponding to HK $0.97). It was downgraded to "overweight" at a valuation of 4.3 times PE in 2019, corresponding to a target price of HK $3.57.