Performance summary: The company released its 2020 semi-annual report. During the reporting period, the company achieved operating income of 10.927 billion yuan, a year-on-year decrease of 4.84%; achieved net profit attributable to shareholders of listed companies of 121 million yuan, a year-on-year decrease of 80.29%, equivalent to EPS of 0.01 yuan; and realized net profit attributable to the mother after deduction was 108 million yuan, a year-on-year decrease of 81.70%.
Operating data: The company achieved iron, steel and timber production of 2.86 million tons, 3.28 million tons and 3.14 million tons respectively in the first half of 2020, with year-on-year changes of -4.16%, +0.90% and +1.38%, and completed 47%, 48% and 49% of the planned production in 2020. Among them, the decline in iron production stemmed from the company's 40-50 day overhaul of blast furnace No. 1 during the pandemic and resumed production in early May. Combined with sales of 3.14 million tons in the first half of the year, the price of a ton of steel was 3,348 yuan, the cost of one ton of steel was 3,67 yuan, and the gross profit of one ton of steel was 181 yuan. The year-on-year changes were -163 yuan, +17 yuan, and -180 yuan respectively.
Financial analysis: 2020H1's revenue fell 4.84% year on year, of which steel revenue fell 4.63% year on year, mainly due to a 5.09% year-on-year decline in sales prices, a 5.35% year-on-year gross margin of 2020H1, a year-on-year decrease of 4.59PCT. The cost rate for the 2020H1 period was 3.55%, a year-on-year decrease of 0.38PCT, mainly due to management expenses falling 26.04% year-on-year due to a reduction in collective incentive funds, and a year-on-year decrease of 20 yuan to 124 yuan per ton of steel. The net profit margin of 2020H1 was 1.11%, down 4.25 PCT year on year, and net profit per ton of steel fell 158 yuan to 39 yuan year on year.
Earnings in the second quarter improved sharply month-on-month: according to company announcements, Q2 achieved net profit of 117 million yuan, an increase of 2825% month-on-month and a year-on-year decrease of 74.8%. Under the influence of the epidemic in the first quarter, although production was running smoothly, sales declined somewhat due to downstream work stoppages and traffic blockages, etc., inventory was passively accumulated. Q2 production was basically flat month-on-month, while sales increased 11% month-on-month. Furthermore, the company continues to pay close attention to cost reduction and efficiency. After achieving a process cost reduction of 84 million yuan in the first quarter, process costs fell by 146 million yuan year-on-year last year. Overall, in the first half of 2020, due to falling steel prices and rising raw fuel prices, the company cut profits by 612 million yuan. However, through comprehensive benchmarking to find differences and pay close attention to cost reduction and efficiency, the main technical and economic indicators improved markedly, and process costs fell 146 million yuan year-on-year. Net profit of 121 million yuan was achieved after absorbing the influence of profit reduction factors in the external market.
Baowu Group became the actual controller of the company: On December 27, 2019, the company received a notice from Si Yuanhe Investment, the actual controller of the company. Si Yuanhe Investment signed a “Letter of Intent” with Baowu Group. Baowu Group intends to become the actual controller of the company. Up to now, the company's main executives have been re-elected, and Baowu Group has actually entered the company's daily management. Backed by Baowu Group, it will form multi-faceted collaborative support for the company. Baosteel Finance Company has added 500 million yuan in loans during the reporting period. At the same time, the company plans to use its own capital of 40 million yuan to jointly invest with Baowu Group, Baoshan Iron & Steel Co., Ltd., Ma Steel (Group) Holdings Co., Ltd., Wuhan Iron & Steel Group Echeng Steel Co., Ltd. and Guangdong Shaogang Songshan Co., Ltd. (tentative name, subject to commercial registration) to form an advantage in bargaining for raw materials. For the company, the quantity and quality resources of iron ore are guaranteed.
Investment advice: As a leading steel company in Sichuan and Chongqing, after going through judicial restructuring, the company has gradually achieved results in accordance with the production and operation policy of “increasing scale, restructuring, and reducing costs” and the main work tone of “comprehensively benchmarking differences, paying close attention to cost reduction and efficiency, management extreme management, and consumption limits”. However, considering that industry sentiment will enter a downward phase, and the company's internal marginal growth room may only be partially hedged, we expect the company's EPS in 2020-2022 to be 0.04 yuan, 0.05 yuan, and 0.06 yuan, maintaining the “hold” rating.
Risk warning: The sharp decline in macroeconomics has put pressure on demand; supply-side pressure continues to increase.