Performance review
1Q23 performance was slightly lower than expected
The company announced 1Q23 results: operating income of 22.74 billion yuan, -14.5% year on year; net profit of the mother was 510 million yuan, -140.6% year on year. Due to fluctuations in the company's blast furnace conditions and the decline in production, the performance fell slightly short of expectations.
1) Steel production and sales declined slightly, and production and sales of axle products were steady. The company's steel production and sales volume in 1Q23 was 482/4.81 million tons, -6.9/ -5.5% year on year, -7.3/ -8.2% month on month, of which plate production and sales were 241/2.43 million tons, -6.2/ -6.2% year on year; the production and sales of long lumber were 234/2.32 million tons, up -7.9/ -4.9% year on year. The decline in the company's production and sales was mainly due to 1Q blast furnace overhaul. The company produced and sold 60,000 tons of 1Q axles, the same as the previous year. The corresponding revenue was +2.2% year on year. The production and sales of the company's train axle products remained steady. 2) Steel prices fell sharply year on year, and steel profits were under pressure. The sales price/cost/gross profit of the company's 23-ton steel in 1Q1 was 4,727/4,721/6, respectively, compared to -495/-3/-492 yuan. The main reason was that falling steel prices compounded strong raw material prices eroded profits and compounded part of the cost of the company's R&D expenses. 3) Periodical expenses continued to be optimized, and operating cash flow improved.
In 1Q23, the company's three-ton steel fee ranged from -5 yuan to 67 yuan over the same period, of which the management/finance cost of tons of steel was -36/-26 yuan to 37/16 yuan over the same period last year. The company's operating cash flow in 1Q23 was 1.66 billion yuan, +1.2/ +160.8% year-on-month. The main reason was that the company faced downward pressure on the industry and strengthened cash flow control.
Development trends
The pace of recovery in industry demand is slow, and company profits are expected to rise steadily in the second half of the year. Recently, we have observed a decline in steel meter demand, a gradual slowdown in inventory removal, a decline in cement shipments, and a marginal weakening of industry fundamentals. We expect that demand in the steel industry in the middle to the second half of the 2Q will usher in a transition point during the low peak season.
However, it will still take time for improvements in core forward-looking indicators of demand, such as liquidity and real estate sales, to be transmitted to actual demand.
We expect that downstream demand from 2H is expected to recover. Combined with the completion of blast furnace maintenance, sales, prices and profits of the company's steel products are expected to rise simultaneously with the recovery in demand.
The transformation of special steel is progressing steadily, and I am optimistic that the company's medium- to long-term competitiveness and profitability will improve. The company's 1.2 million-ton new special steel project has been put into operation. Currently, production capacity is climbing. The project focuses on a broad market space in the fields of railway rail transit, wind power, etc., and the company has accumulated rich resources in related axle and other markets. We believe that the commissioning of the company's new special steel project marks a solid step in the company's transformation into the field of special steel long steel. Looking ahead, the new special steel project is expected to further strengthen the competitive advantage of its products. We are optimistic that the release of the new special steel project will bring an increase in competitiveness and profitability to the company.
Profit forecasting and valuation
The recovery in downstream demand fell short of expectations. We lowered 2023e/24e net profit by 35.8%/40.1% to 459 million yuan/1,797 million yuan. The current A/H stock price corresponding to 2023e/24e P/B is 0.7x/0.7x and 0.4x/0.3x, respectively. We maintain that A/H shares outperform industry ratings. Considering that demand in the 2H steel industry is expected to pick up, we keep the target price of A/H stock at 3.6 yuan/HK$2.2 unchanged. The corresponding 2023e/24e P/B is 0.9x/0.9x and 0.5x/0.5x respectively. There is room for an upward trend of 31.9%/31.7% from the current stock price.
risks
Steel prices continued to decline; off-season demand fell more than expected; and the recovery of the real estate boom fell short of expectations.