Event

On April 8, the company released its annual report for 2019: the company realized a net profit of 918 million yuan per share in 2019, a decrease of 52.60 percent over the same period last year, and basic earnings per share of 0.27 yuan per share during the reporting period, compared with 0.57 yuan per share last year.

The performance of the main iron and steel industry has declined, environmental protection, and trade sectors support profits.

In 2019, the supply release led to an increase in the degree of surplus in the industry, steel prices were under pressure, overhaul of No. 1 blast furnace affected production, and the profitability of the company's main steel industry declined. During the reporting period, the company's hot coil production and sales volume was 4.3244 million tons and 4.3276 million tons, down 2.28% and 1.17% respectively from the same period last year; the average annual price of hot rolled coiled plates was 3371.31 yuan per ton, down 5.82% from the previous year; and the annual revenue from self-produced steel was 14.748 billion yuan, down 10.52% from the same period last year. At the same time, the rise in iron ore prices raised costs, and the gross profit margin of the company's steel business sector was 9.81% in 2019, down 8.95 percentage points from the previous year. During the reporting period, the company's environmental protection and commodity trade sector business made steady progress. In 2019, the revenue of the environmental protection business reached 442 million yuan, an increase of 7.50% over the same period last year. Affected by the increase in overseas sales revenue, the commodity trade business achieved revenue of 11.181 billion yuan for the whole year, an increase of 24.49% over the same period last year.

Accelerate the layout of the secondary industry by acquiring related business of the main business

In June 2019, the company plans to acquire 100% equity in metallurgical materials and Dongling Trading and 99.5% equity in Hangzhou Iron and Steel International Trade by issuing shares and cash payment, and pay cash to Fuchun Company to purchase its subordinate business sector operating assets and liabilities. After the completion of this restructuring, the company's steel manufacturing and trading industry will be listed as a whole and enhance its ability to resist industry risks. While ploughing steel and environmental protection business, the company is involved in the digital economy industry. In October 2019, the company completed the acquisition and capital increase of 100% equity in Hangzhou Hangang Cloud Computing data Center Co., Ltd., and will invest in the construction and operation of the first phase of Hangzhou Iron and Steel Cloud Computing data Center project. At the same time, the company increases its investment in strategic emerging industries, and plans to contribute 1 billion yuan to Zhejiang Fuzhe Integrated Circuit Industry Development Co., Ltd., accounting for 7.69% of its shares, by the way of free transfer of the contribution share of Hangzhou Iron and Steel Group. As one of the sponsors of the second phase of the National large Fund, Fuzhe Company's participation in Fuzhe Company is conducive to doing business with the leaders of the integrated circuit industry and promoting the coordinated development of the company's IDC and other businesses. Since the beginning of this year, the downward pressure on the economy affected by the epidemic has increased, and the meeting of the standing Committee of the political Bureau of the CPC Central Committee held on March 4 pointed out the need to speed up the construction of new infrastructure such as 5G networks and data centers. With the intensive deployment of "new infrastructure" by the central government, the IDC industry may usher in rapid development in the future, and the second main industry will usher in development opportunities.

Investment suggestion

We believe that the 20-22 return net profit of the company is 9.85, 10.69, 1.19 billion, respectively, and the corresponding EPS is 0.29, 0.32, 0.33 yuan, respectively, with a "buy" rating.

Risk hint: the mismatch between supply and demand in the iron and steel industry leads to a decline in profits in the company's steel business, a lack of IDC progress and unpredictable risks in the company's own operation.