Performance summary: the company released the semi-annual report for 2020, with operating income of 9.8 billion yuan during the reporting period, an increase of 2.5% over the same period last year; net profit attributable to shareholders of listed companies was 69 million yuan, down 44% from the same period last year; and net profit was deducted from 54 million yuan, down 55% from the same period last year. The EPS in the first half of the year was 0.04 yuan, and the EPS in a single quarter was-0.12 yuan and 0.17 yuan respectively.

The demand in Xinjiang improved significantly in the second quarter: in the first quarter, due to the epidemic and seasonal factors, the demand for steel in Xinjiang was significantly suppressed, and the company's operation fell into a state of loss. Benefiting from the fact that Xinjiang is ahead of the country in epidemic control and the positive fiscal policy, demand in Xinjiang began to release rapidly after mid-April, especially the concentrated outbreak of construction steel demand. The company's second-quarter sales of building materials were 890000 tons, an increase of 29% over the same period last year. Overall steel sales increased by 22% over the same period last year, and the production and sales rates of building materials and plate materials were as high as 120% and 116%, respectively. From the performance point of view, the decline in the company's profits in the first half of the year is basically the same as that of the industry (about 50%). Although the overall performance of the industry demand is OK, the smelting end maintains a state of exuberant production, and the relationship between supply and demand continues to decline and profitability shrinks. During the reporting period, the company's steel output was 2.71 million tons, an increase of 2.7% over the same period last year, basically unaffected by the epidemic. According to the financial data, the company's management expenses decreased by 40% compared with the same period last year, which was mainly due to the reduction of logistics service fees; the R & D expenses decreased by 96% compared with the same period last year, mainly due to the decrease in investment in new products; and the income tax expenses increased by 55% compared with the same period last year.

The sustained development of infrastructure in Xinjiang can be expected: investment in fixed assets in Xinjiang depends more on infrastructure investment, and because of its unique geographical advantages, the construction of many infrastructure projects in Xinjiang is more an extension of the national strategic level. therefore, the efficiency of its projects is much higher than that in other regions, once the fiscal and monetary policy turns loose, Xinjiang will benefit from the opening of the infrastructure cycle to the greatest extent. In order to hedge the impact of the epidemic and guard against economic uncertainty, policies have been issued intensively at the national level to support infrastructure construction, and the western development strategy has been put on the agenda again. There are sufficient preparatory key projects in Xinjiang, and the continuous development of infrastructure in the future will effectively boost the demand for related industrial products. At present, the second epidemic situation of COVID-19 in Xinjiang has been effectively controlled, which has an impact on the construction rhythm of some projects to a certain extent, but the overall situation is limited.

The iron and steel production capacity in Xinjiang continues to be cleared, and Baosteel will shoulder the important task of integration in the future: Xinjiang iron and steel production capacity has been effectively cleared during the 13th five-year Plan period. According to the latest strategic policy of Baowu Group, the actual controller of the company, Baosteel will take the completion of production capacity integration in Xinjiang as a key work in 2020. Under the current competition pattern of Xinjiang iron and steel industry led by Baosteel, superimposed with the support of Baowu Group, through further integration of production capacity, the steel market in Xinjiang is expected to become more orderly and stable. At the same time, the profits of steel enterprises gradually return to a reasonable level, superimposing the special regional characteristics of Xinjiang, which can effectively prevent the inflow and impact of steel products outside Xinjiang, and the steel market in Xinjiang is expected to form a regional closed loop. Leading steel enterprises will also benefit from the improvement of the competition pattern and the rebound of industry prosperity to the greatest extent.

Investment suggestion: Xinjiang, as a deterministic province of infrastructure development, will benefit most from the opening of the capital construction cycle, while Baosteel, with the support of Baowu Group, is expected to further integrate regional production capacity in the future, superimposed steel industry profits to return to a reasonable level, high transportation costs can effectively prevent the inflow of steel outside Xinjiang, and the steel market in Xinjiang is expected to form a regional closed loop. The company is the only steel enterprise with plate production capacity in Xinjiang, and it has differential competitiveness. As a leading steel enterprise, it will benefit from the rebound of industry prosperity and the improvement of regional competition pattern to the greatest extent. It is estimated that the company's net profit attributable to shareholders of listed companies from 2020 to 2022 is 170 million yuan, 330 million yuan and 490 million yuan respectively, with a growth rate of 57%, 89% and 48% respectively.

Risk hints: the progress of infrastructure construction is not as expected; the risk of deterioration of the epidemic situation in Xinjiang; the risk of steel inflow outside Xinjiang.