The operating income of the 2023H1 company was 57.368 billion yuan, a decrease of 9.22%; net profit of the return mother was 410 million yuan, a decrease of 77.14%. Among them, Q2's quarterly revenue was 28.653 billion yuan, a year-on-year decrease of 8.54%; net profit due to the mother was 469 million yuan, a decrease of 35.56%, turning a loss into a profit over the previous quarter.

The product structure continues to be optimized, and the proportion of high-end products is increasing. 2023H1 achieved steel production of 11.717 million tons, an increase of 2.29% over the same period. Among them, the company's three strategic products, metal soft magnetic materials (electrical steel), automobile panels, and tinned plates, achieved a total production of 3.13 million tons, nine types of key products, including cold-rolled special steel and hot-rolled pickling plates, and 7.74 million tons of strategic and key products, accounting for 66% of the company's total steel output, an increase of 4 pct over the previous year. Among them, the company's electrical steel output was 848,200 tons, an increase of 18%. Among them, high-end products (oriented and unoriented high-grade grades) accounted for 63%, an increase of 1 pct over the previous year. Furthermore, in April, the company built the world's first 100% thin-scale, high-magnetic-oriented electrical steel production line, which will add 90,000 tons of production capacity every year.

The share of electrical steel revenue has increased, and demand has dragged down tons of gross profit. The company's steel products (excluding electrical steel) sales business achieved revenue of 48.623 billion yuan in the first half of 2023, a decrease of 11.24%, mainly due to weak demand; the electrical steel sales business achieved revenue of 6.976 billion yuan, an increase of 7.37%, accounting for 12.16% of total revenue, an increase of 2 pct over the previous year. During the reporting period, the company's gross margin was 5.31%, down 2.28 percentage points; gross profit per ton of steel products was 224 yuan, down 43.49% year on year; gross profit per ton of electrical steel was 520 yuan, down 60.7% year on year.

Expense rates declined during the period, and Q2 net profit turned a loss into a profit. The cost rate for the 2023H1 period was 2.88%, down 0.13 percentage points from the same period. Among them, sales and management cost rates increased by 0.02 and 0.08 percentage points, respectively; R&D and financial expenses rates decreased by 0.18 and 0.05 percentage points, respectively. The company's impairment losses totaled $323 million, an increase of $226 million over the previous year, mainly due to reduced inventory prices and increased impairment losses in contract performance costs. Overall, the company achieved net profit of 410 million yuan, a decrease of 77.14%. Among them, Q2 achieved net profit of 469 million yuan, a year-on-month decrease of 35.56%, turning a loss into a profit.

The current ratio of income to payments has increased, and the balance ratio has declined. The company's 2023H1 revenue ratio was 0.5049, up 5.65 percentage points, mainly due to a decline in revenue; the pay-to-cash ratio was 0.4767, up 8.72 percentage points, mainly due to a sharp increase in raw material costs. Overall, the net cash inflow from operations was 360 million yuan, a year-on-year decrease of 1.92 billion yuan; the net outflow from investment activities was 1.3 billion yuan, an increase of 260 million yuan over the previous year, mainly due to an increase in cash payments from investment. The company's balance ratio was 62.73%, down 2.31 pct from the end of last year, mainly due to a decrease in payables.

Investment suggestions: Demand in the steel industry was still weak in the first half of the year, but the company actively optimized its structure, increased investment in high-end products, and continued to reduce costs and increase efficiency. There may be a lot of pressure on the industry to cut production in the fourth quarter, and industry profits are expected to rise significantly.

It is estimated that in 2023-2025, the company will achieve net profit of 1,380, 16.41, and 1,843 billion yuan, corresponding to PB 0.6, 0.6, and 0.6, maintaining the “highly recommended” rating.

Risk warning: risk of steel price fluctuations, continued decline in downstream demand, demand for electrical steel falling short of expectations