Main points of investment

Performance summary: the company released the 2019 annual report, during the reporting period, the operating income was 121.5 billion yuan, an increase of 0.45% over the same period last year; the net profit attributed to shareholders of listed companies was 2.56 billion yuan, down 29.4% from the same period last year; and the net profit after deducting non-return was 2.53 billion yuan, down 29.1% from the same period last year. During the reporting period, the EPS was 0.20 yuan, and the EPS in a single quarter was 0.03,0.08,0.06,0.07 yuan respectively. At the same time, the company released a report for the first quarter of 2020, which showed that its operating income was 23.58 billion yuan, a decrease of 19.6% over the same period last year, and its net profit was 229 million yuan, a decrease of 37.9% over the same period last year, equivalent to 0.02 yuan in EPS.

Ton steel data: during the reporting period, the company produced 27.12 million tons of iron, 26.72 million tons of steel and 25.32 million tons of materials, an increase of 2.1%,-0.3% and-1.8% respectively over the same period last year. Combined with the annual report data, the price of comprehensive ton steel is 4293 yuan, the cost per ton steel is 3738 yuan, and the gross profit per ton steel is 555 yuan, which is-3 yuan, 49 yuan and-52 yuan respectively compared with the same period last year.

The upgrading of customer and product structure has achieved results: looking back in 2019, although the demand performance of steel downstream is still strong under the strong pull of real estate, the supply side of the industry continues to be pressurized due to factors such as the relaxation of production restrictions on environmental protection and the commissioning of replacement capacity. Industry profits fell sharply between advance and retreat. According to our estimates, taking into account the raw material inventory cycle, the average gross profit per ton of hot-rolled plate, cold-rolled plate, rebar and medium and heavy plate products in 2019 was 313 yuan,-23 yuan, 524 yuan and 193 yuan respectively, down 57%, 106%, 39% and 70% respectively from the same period last year, and the plate performance was relatively weak. The company's three main production bases (Tangshan, Handan and Chengde) are all located in the area of environmental protection production restrictions. due to the impact of environmental protection production restrictions in 2018, the company's output was suppressed, costs rose, and performance was dragged down. As a plate-based manufacturer, the decline in the price and profit of per ton steel in 2019 is lower than that of the industry, on the one hand, due to the low profit base caused by the production limit in 2018. On the other hand, the company continues to upgrade in terms of customers and product structure. Variety steel, high-end products and characteristic strategic products have all reached the best level in history. 700Mpa grade hot-rolled high-strength steel bars have filled the gap of domestic hot-rolled ultra-high-strength steel bars, and automobile plates have achieved full strength coverage. in 2019, the gross profit margins of bars, profiles and wire strips were 14.8% and 13.9% respectively, which were higher than those in 2018. To a certain extent, it offsets the decline of the profitability of sheet products. The cost of three items per ton of steel in 2019 was 442 yuan, an increase of 21 yuan over the same period last year, mainly because sales expenses and management expenses increased by 23.8% and 13% respectively compared with the same period last year.

The asset-liability ratio is expected to be reduced: in March 2019, the company announced that it planned to allocate to all shareholders in the proportion of no more than 3 shares for every 10 shares, and the total amount of funds raised would not exceed 8 billion yuan. After deducting the issuance expenses, all the net amount will be used to repay the company's interest-bearing liabilities. For a long time, the company's asset-liability ratio has been more than 70%, which is at a relatively high level in the industry, resulting in high financial costs. Through this rights issue, the asset-liability ratio is expected to fall to 67.7%, which will help to reduce financial risks and improve profitability. The application for the rights issue was formally approved by the CSRC in January this year.

Industry profits still face downward pressure: in the medium to long term, the low interest rate environment and the marginal relaxation of real estate policy can only play a role in maintaining stability, and there is a greater downside risk in the real estate sales cycle which has accumulated greater mean regression pressure. the front end of the real estate investment structure is transmitted to the back end; infrastructure investment is expected to continue to maintain a moderate upward trend under the support of active fiscal policy. Affected by the epidemic, the profits of industrial enterprises continue to decline compared with the same period last year, and in the case of insufficient profit expectations, investment in the manufacturing industry is hardly optimistic. On the whole, it is disadvantageous to the demand for steel, and the downward pressure on the profitability of the industry is not reduced.

Investment suggestion: the upgrading of the company's internal structure is becoming more and more effective. at the same time, the implementation of the future rights issue will effectively solve the company's long-standing problem of high asset-liability ratio and improve profitability. However, due to the impact of the epidemic and cyclical downward pressure on demand, the fundamental risks of the industry are still high. It is estimated that the EPS of the company from 2020 to 2022 is 0.11,0.12 and 0.14 yuan, respectively, and the corresponding PE is 19x, 18x and 15x respectively, with a "hold" rating.

Risk hint: the epidemic event intensifies, the rights issue is uncertain, and the macroeconomic downturn.