The company recently announced that its subsidiary Jinxi Iron and Steel plans to establish an H-beam and steel sheet pile production base with an annual capacity of about 10 million tons in Fangchenggang City in two phases, which is in line with the adjustment strategy of the national iron and steel industry layout. At the sales end, the company is expected to rely on the product advantages of section steel, out of the road of differentiation in Guangxi to enjoy a high premium, and rely on the regional advantages of Fangchenggang to open up overseas markets; at the cost side, it will effectively reduce the cost of iron ore transportation.
It is proposed to establish an H-shaped steel and steel sheet pile production base with an annual production capacity of about 10 million tons in Fangchenggang City in two phases.
According to the announcement issued by the company on September 3, 2019, Jinxi Iron and Steel should start to move its existing production capacity in Tangshan to or from other ways to Fangchenggang City within 5 days from the signing of the investment agreement. In order to achieve the establishment of H-beam and steel sheet pile production base project, the two stages have an annual production capacity of about 5 million tons of steel, a total of about 10 million tons. The two phases will be completed within 18 months from the date of the project agreement.
According to the investment agreement, Jinxi Iron and Steel will acquire 7500 mu of project land use rights for about 840 million yuan by the project company through bidding. The investment in the first phase of this project is about 17 billion yuan, and the total investment cost is about 30 billion yuan.
This cooperation project is in line with the national strategy for adjusting the layout of the iron and steel industry in the southeast coastal areas. The Adjustment and upgrading Plan of Iron and Steel Industry (2016-2020) puts forward a clear orientation for the southeast coastal areas, which should focus on adjusting the national iron and steel layout of "heavy in the north and light in the south", and build first-class coastal iron and steel bases such as Zhanjiang and Fangchenggang. The cooperation between Jinxi Iron and Steel and Fangchenggang is expected to accelerate the construction process of the coastal steel boutique base in Guangxi, which is very suitable for the development of China's coastal iron and steel industry cluster and industrial chain.
H-beam to improve the regional product structure, take the road of differentiation is expected to enjoy the regional product premium. The supply and demand pattern of steel in Guangxi is tight, which is a typical net inflow of steel to the province. the steel price is significantly higher than that in the mainstream areas of the country, and local steel enterprises can significantly enjoy the regional premium. Jinxi Iron and Steel Project mainly produces H-shaped steel and steel sheet piles, which can fill the gap of H-shaped steel products in Guangxi and walk out of the road of differentiation in the existing product pattern in the region. the products are expected to get a further premium on the basis of the already high regional price.
Setting up a factory in the port can significantly reduce the cost of iron ore transportation, and Fangchenggang is also an important hub for export to ASEAN.
The difference in the acquisition cost of imported ore is mainly reflected in the transportation cost from the port to the steel mill. Setting up a plant in Fangchenggang can well control the iron ore cost. At the same time, Fangchenggang is located in the joint of China-ASEAN Free Trade area, Pan-Pearl River Delta Economic Circle and Guangxi Beibu Gulf Economic Zone, and is an important hub for exporting steel to ASEAN countries. Relying on ASEAN and facing Southeast Asia, Jinxi Iron and Steel is expected to further open up foreign steel markets through this project.
Risk factors: the progress of the acquisition of land in the project is not as expected; the cost of raw materials is higher than expected.
Investment suggestion: the company is a leading enterprise of section steel in North China, and the profitability of section steel products is strong and tough. Considering that the Fangchenggang project has a certain construction cycle, the impact on the company's short-term operating performance is expected to be limited. We maintain the company's 2019-2021 EPS forecast of 0.76 pounds 0.82 pounds 0.88 yuan (corresponding to 0.84 pounds 0.91 pounds 0.97 Hong Kong dollars) and maintain the "overweight" rating.