The company's first-half revenue and home net profit increased by 0.55% and decreased by 38.9% respectively compared with the same period last year. The decline in the company's profits is better than the industry average. With the arrival of the peak season in the fourth quarter, the steel inventory structure is expected to improve, and the company's profits are expected to bottom out as the industry improves in the fourth quarter.

Affected by the rise in the price of raw materials, the company's profits have declined. 2020H1 achieved revenue of 23.003 billion yuan, an increase of 0.55% over the same period last year; net profit of 773 million yuan, down 38.9%; and gross profit of 1.767 billion, down 24.7% from the same period last year. The decline in the company's profits during the reporting period is mainly due to the compression of steel profits by raw materials such as coke and iron ore. The average Platts index of 62% grade in the first half of 2020 was basically the same as that in the same period last year, while the typical Shanghai rebar average fell 9.5% compared with the same period last year. In addition, the company achieved a total of 4.1439 million tons of steel production and sales of 4.169 million tons in the first half of the year, up 6.06% and 6.84% respectively over the same period last year.

The decline in corporate profits is less than the industry average. 2020H1 achieved a gross profit margin of 7.68%, down 2.58% from the same period last year, and a total gross profit of 1.767 billion yuan, down 24.7% from the same period last year. The average gross profit per ton of long wood in our simulation dropped by 48% in the first half of this year compared with the same period last year. One of the reasons why the decline in gross profit of the company is less than the industry average is that billet related party transactions play a role in stabilizing profit adjustment to a certain extent. The company's steel products are mainly long products, and more than 5 million tons of billet are sold to the group every year, and the gross profit margin of billet sales is not higher than 8% in principle. From the historical trend, the gross profit margin of billet related transactions is often negatively correlated with the trend of industry profitability. In the case of a significant decrease in the profitability of the industry, the company can increase the gross profit margin of billet related party transactions to a certain extent so as to hedge against the decline in performance.

With the arrival of the steel season, the company's profits are expected to bottom out from the fourth quarter. The overall supply of the industry this year is still very rigid, with crude steel production up 2.8% from January to July and pig iron production up 7.9% from the same period last year. The total inventory of steel is at a high level and the inventory of iron ore is at a low level over the years. The sharp rise in iron ore prices continues to erode steel profits. Since April, industry talent profits have gradually fallen to their lowest level since 2017 and are still hovering at the bottom. Some iron and steel enterprises in the industry are on the edge of break-even, under such circumstances, the output of the follow-up industry continues to lack momentum. With the arrival of the peak season demand for steel in the fourth quarter, the inventory structure of steel is expected to be optimized and profits are expected to bottom out.

Risk factors: the decline in downstream real estate investment and new construction exceeded expectations; the supply side exceeded expectations.

Investment advice: this year, the problem of the supply side of the industry is still prominent, resulting in a sharp rise in raw material prices continue to erode steel profits, the overall profit level of the industry is significantly lower than last year. At present, long talent profits are at their lowest level since 2017, and industry profits are expected to bottom out in the fourth quarter with the arrival of peak season demand. In the long run, industry demand growth continues to slow, and profitability is likely to continue to hover at a low level. Considering that after 2019, with the recovery of overseas iron ore supply, the pressure of raw materials on the compression of steel profits will decrease, and the impact of the epidemic on the real economy will gradually fade, we will adjust the company's EPS forecast for 2020-21 from 0.66 to 0.57 to 0.66 to 0.74 to 0.79. The company is the leader of steel enterprises in Guangxi Province, the current PB valuation is still low, according to the 2020 PB valuation of 1.2 times, maintain the target price of 5.56 yuan, maintain the "overweight" rating.