Main points of investment

Performance summary: during the reporting period, the company achieved operating income of 50.4 billion yuan, down 19% from the same period last year; the net profit of shareholders belonging to listed companies was 690 million yuan, down 41% from the same period last year; and the net profit after deducting non-return was 660 million yuan, down 43% from the same period last year. The EPS in the first half of the year is 0.07 yuan, and the EPS in a single quarter is 0.02 yuan and 0.04 yuan respectively.

Many factors reduce production, reduce costs and increase efficiency to maintain product profits: in the first half of the year, due to the impact of the epidemic on downstream demand and the relatively strong production state at the smelting end, the profits of the iron and steel industry continued to decline. From the recent disclosure of semi-annual report results of listed companies, the net profits of most steel enterprises have dropped by about 50%, and the overall trend of corporate profits is basically in line with the industry. Specifically, during the reporting period, the company produced 12.37 million tons of iron, 11.75 million tons of steel and 11.48 million tons of steel, respectively, down 12.3%, 16.3% and 13.4% from the same period last year, mainly due to environmental production restrictions, partial capacity shutdown of Tangshan branch relocation and epidemic factors. In terms of product profitability, the gross profit margin of the main steel industry is 12.7%, an increase of 1.7% over the same period last year, which is different from that of the industry. thanks to the fact that the company has actively carried out a lot of work in advance around the re-optimization of the "two structures", improving operating indicators and strengthening cost control, especially the marketing and procurement system, which ensures the stability of the supply chain and client, and the profitability of related products is stable.

Pay attention to the relocation progress of Tangshan branch: the company issued an announcement on August 20, signing a withdrawal relocation agreement with the Tangshan municipal government on the closure and compensation of Tangshan branch capacity in the urban area. Tangshan Branch has ironmaking capacity of 7.04 million tons, steelmaking capacity of 6.84 million tons, steel rolling capacity of 11 million tons. The relocation of the city, except for a cold rolling mill and other assets continue to operate, the rest of the assets need to be closed nine months ago. According to the total shutdown at the end of August, the company is expected to reduce pig iron, steel and steel production by 1.82 million tons, 1.74 million tons and 1.67 million tons respectively. In order to minimize the adverse impact of the relocation on the production and operation of the company, the company acquired Hegang Leting Iron and Steel Co., Ltd. as a wholly-owned subsidiary in April 2020, increasing the production capacity of pig iron, steel and steel by 7.32 million tons, 7.47 million tons and 7.1 million tons respectively. Higang Leting will be put into production in September 2020 and is expected to produce 1.55 million tons of pig iron, 1.48 million tons of steel and 1.42 million tons of steel by the end of 2020, effectively hedging most of the relocation impact from the production level. The relocation to the coast will help to enhance the company's cost advantage, product structure and user structure, and enhance the company's long-term development momentum; the asset-liability ratio is expected to be reduced: the company announced in April and July this year that it publicly issued two issues of corporate bonds to QFII, with a total size of 3 billion yuan, which is intended to be used to repay loans from financial institutions. 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 expenses. Issuing bonds will help to reduce financial risks and improve profitability. Investment suggestion: the upgrading of the company's internal structure is becoming more and more effective, and the transfer of production capacity to the coast of Tangshan Branch will help to reduce production and operating costs and enhance the competitiveness of the company's products in the long run, by issuing bonds and other ways, it will effectively solve the company's long-standing problem of high asset-liability ratio and improve profitability. It is estimated that the EPS of the company from 2020 to 2022 is 0.16,0.17 and 0.19 yuan, respectively, and the corresponding PE is 14x, 13x and 12x, respectively.

Risk tips: the intensification of the epidemic, the impact of the relocation of Tangshan branch on performance, macroeconomic decline.