1H23 performance fell short of our expectations

The company announced 1H23 results: revenue of 58.825 billion yuan, -16.3/ -3.2%, net profit -1,3/ -3.2%, net profit -1,346 billion yuan, year-on-year, -178.4%; 2Q quarterly revenue/net profit of 27.981 billion yuan -1,197 billion yuan, -20.9/ -611.5% year-on-year. Weak demand compounded by narrowing supply and marketing spreads, and 1H23 performance fell short of our expectations.

1) Steel prices and gross profit declined year-on-year. The company's 1H23 steel production was 13.83 million tons, +9.1/ +16.1% over the same period; steel sales were 12.79 million tons, or -1.9/ 0% over the same period. We estimated that the sales price/gross profit/net profit of the company's 1H23 tons of steel was 3708/-11/-105 yuan, year-on-year -775/-294/-237 yuan, and -62/+38/+17 yuan over the previous year. 1H23 Gross profit declined significantly year-on-year due to weak market demand and the narrowing of the price difference between supply and marketing. 2) There was a slight improvement in fees during the period. 1H23 comprehensive tonnes of steel cost -2/+5 yuan to 94 yuan/ton, of which the financial cost for tonnes of steel is 12 yuan/ton, and -9/-4 yuan over the same period. The decline in financial expenses for tonnes of steel is mainly due to an increase in exchange earnings affected by H-share convertible bonds compared to the same period last year and a decrease in interest rates on bank loans. 3) Operating cash flow is under pressure. Due to a sharp decline in gross profit in the first half of the year, the company's 1H23 operating cash flow was -41.7% year-on-year to 2,415 billion yuan, and operating cash flow was under pressure in the short term. 4) Asset quality remains stable. As of 1H23, the company's balance rate/net debt ratio was 40.0/ 1.9%, +2.6/-0.7ppt year on year, and -1.2/+1.5ppt month-on-month. The overall capital structure remained stable.

Development trends

Under the “three lows” pattern, the peak season stock replenishment market can be expected. We believe that at present, the steel sector is still in the three low pattern of “low inventory/low valuation/low profit”, which has both a high win rate and high elasticity in a potential recovery cycle. In the context of low inventories, we believe that the inventory cycle is expected to follow demand as demand enters the peak season and into phased active replenishment, further increasing demand elasticity. At the same time, the drop in steel production pressure is expected to gradually advance, and industry supply is under pressure. We are optimistic about the peak season replenishment market. Tighter supply and demand in the industry are expected to drive a rebound in steel prices and the sector.

The core assets of Steel, a subsidiary of Angang Steel Group, are optimistic about the company's extended growth prospects in the medium term. The company is the core asset of Angang Steel. We are optimistic that the company will further expand its production capacity as an integrated entity in the future. It will achieve epitaxial growth through continuous export of excellent management capabilities, superimposed scale advantages, and higher market share and voice in the regional market. At the moment, the company's P/B (MRQ) is 0.47X, which is at the historical level of 20%. We are optimistic that the company will experience a recovery in profit and valuation after a recovery in demand in the medium term.

Profit forecasting and valuation

Considering the slow recovery in demand and the high fluctuation in upstream raw material prices, we lowered 23e net profit from 1,214 billion yuan to 285 million yuan, and 24e net profit 35.6% to 2,432 billion yuan. Currently, 23/24e 0.5x/0.4x P/B corresponding to A shares and 23/24e P/B corresponding to H shares are all 0.3x. We maintain the company's neutral rating. Considering that the target price of A shares is within a reasonable range, the target price of A shares remains unchanged at 3.5 yuan (corresponding to 23/24e 0.6x/0.5 P/B); considering the high fluctuations in the Hong Kong stock market, we lowered the target price of H shares by 16.7% to 2.5 HKD (corresponding to 23/24e 0.4x/0.4x P/B), and A/H shares implied an increase of 22.8%/24.4%.

risks

The recovery in the real estate boom fell short of expectations, and the macroeconomic economy was declining at an accelerated pace.