Performance summary: the company released its third-quarter performance report in 2020, with operating income of 20.6 billion yuan in the first three quarters, an increase of 2.5% over the same period last year, and a net profit of 300 million yuan belonging to shareholders of listed companies, an increase of 26% over the same period last year, corresponding to 0.2 yuan of EPS. Of this total, the operating income in the third quarter was 5.9 billion yuan, down 1.4% from the same period last year, and the net profit was 230 million yuan, up 100% from the same period last year, down 10.4% from the previous month.

The Q3 epidemic has a significant impact on the company: Xinjiang, as a province with certainty of capital construction capacity, benefited most from the opening of the capital construction cycle under the proactive fiscal policy in the first half of this year, which significantly accelerated the release of demand and effectively boosted steel demand. However, the second epidemic in Xinjiang, which began in mid-July and lasted for nearly a month, had a certain impact on the construction of downstream projects. The cumulative growth rate of fixed asset investment in Xinjiang dropped significantly in July and August compared with the same period last year. At the same time, steel prices in Xinjiang fell abnormally in August, and lost its price advantage compared with the mainland in September. At the company level, in the third quarter, as the traditional peak demand season, production and sales in the single quarter of previous years will increase to a certain extent, but this year, Q3 company building materials and plate sales fell 8% and 14% respectively, in line with the trend of macro and industry data. Despite the disturbance of negative factors, the company's net profit of 139 yuan per ton of steel in the third quarter is basically the same as that in the second quarter, indicating that the overall prosperity of the industry is OK. Recently, the epidemic broke out again in Kashgar, Xinjiang. At present, the scope of impact is relatively small, and the subsequent impact on regional demand and enterprise production remains to be observed.

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.

Xinjiang is in the vanguard of infrastructure construction, and its follow-up efforts can still be expected: unlike most other provinces and cities in the country, fixed assets investment 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, so the efficiency of its projects is much higher than that of other regions. When the fiscal policy turns positive, the growth rate of fixed asset investment in Xinjiang is obviously ahead of other provinces and cities. In recent years, the central government has reduced the weight of local government GDP growth assessment, especially after the outbreak of the epidemic, more emphasis has been placed on protecting people's livelihood and employment, and local governments are not willing to promote infrastructure construction, resulting in lower-than-expected growth of overall infrastructure investment. By comparison, the fluctuation of Xinjiang solid investment growth rate is much greater than that of other provinces and cities, as fiscal and monetary policies remain relatively loose. Xinjiang will benefit most from the opening of the capital construction cycle.

Investment suggestion: the epidemic in the third quarter has had a certain negative impact on demand in Xinjiang, but in the medium to long term, the strategy for the large-scale development of the western region has been put on the agenda again, the preparation of key projects in the region is sufficient, and the sustained development of infrastructure in the region can still be expected, which will effectively boost the demand for relevant industrial products. 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. From 2020 to 2022, the company's EPS is expected to be 0.25,0.36 and 0.46 yuan respectively, corresponding to 13x, 9x and 7x respectively, maintaining the "overweight" rating.

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.