3Q23 performance was higher than our expectations
The company announced 3Q23 results: revenue of 24.94 billion yuan, +8.7/ -5.0% month-on-month; net profit increased sharply to 640 million yuan. Due to the continuous optimization of the company's product structure, 3Q performance was higher than our expectations.
1) 3Q23 Steel production and sales improved year-on-year, and plate production and sales were superior to long materials. 3Q23's steel production and sales volume were 537/5.27 million tons, respectively, +18/ +15% over the same period last year. Among them, plate production and sales were 268/2.61 million tons, +24/ +18%; long material production and sales were 263/2.58 million tons, +13/ +12%; and axle production and sales were 6/80,000 tons, +20/ +33% year-on-year. 2) A slight increase in steel prices combined with a reduction in cost pressure, and gross profit per ton of steel was greatly optimized. The 3Q23 company's tonne steel sales price/gross profit was 4029/244 yuan, year-on-year: -339/+142 yuan, +139/+373 yuan month-on-month, and overall gross margin of +3.1/+7.8ppt to 5.2% month-on-month. 3) Cost reduction and efficiency are progressing steadily, and the management costs of tons of steel have dropped significantly. The company's 3Q23 three-ton steel cost is the same as /month on month - 62/-11 yuan to 81 yuan, of which the management cost of tons of steel was the same /month on month - 58/-14 yuan to 38 yuan. 4) The asset structure continues to improve, and the net operating cash flow has declined significantly. The company's 3Q23 balance ratio/net debt ratio was 62.15/ 38.11%, year-on-year -0.5/-18.8ppt, month-on-month -1.2/-4.4ppt; net operating cash flow inflow was -1,540 billion yuan, same /month on month -158.6/ -189.4%.
Development trends
Product structure optimization is progressing steadily, and we are optimistic that the company's long-term product competitiveness and profitability will improve. We observed that the price of the company's 3Q plate and axle products was 4227/12570 yuan/ton, respectively, +0.5/ +5.3% over the previous month. Mainly, the company gradually released high-end products such as high-grade silicon steel/color coated plates. Currently, the company's 1.2 million ton new special steel project is in the stage of rising production capacity. It focuses on high-end special steel products such as bearing steel/gear steel. We believe that in the medium to long term, it is expected to further enhance the company's competitiveness in UTO steel long materials and lay a solid foundation for the company's transformation into special steel.
The positive signal of “steady growth” boosts confidence, and the company is expected to face valuation recovery under the “three lows” pattern. Currently, the steel sector is still in the three-low pattern of “low inventory, undervaluation, and low profit”, with a high margin of safety, higher potential profit during the recovery cycle, and stock price elasticity. With the recent further clarification of the government's “steady growth” signal, combined with the trillion-dollar treasury bonds driving downstream demand, we believe that the company has fully benefited as a leading long-term materials enterprise in East China. Profits are expected to gradually reach the bottom, and valuation recovery can be expected.
Profit forecasting and valuation
Considering that 3Q23 earnings exceeded expectations and losses for the whole year may narrow, we raised 23e net profit from -1,304 billion yuan to -1,082 million yuan, keeping the 24e net profit unchanged. Currently, the stock price of A/H shares corresponds to 23e 0.8x/0.3x P/B and 24e 0.7x/0.3x P/B, corresponding to 24e 0.7x/0.3x P/B. We maintained our outperforming industry ratings and raised the target price of A shares by 6.3% to 3.4 yuan (corresponding to 23/24e 0.89x/0.86x P/B), implying 25.5% upside. Considering that the target price of H shares is within a reasonable range, keeping the target price of H shares unchanged (corresponding to 23/24e 0.47x/0.45x P/B), implying 35.3% upward space.
risks
The recovery in the real estate boom fell short of expectations, and the macroeconomic economy was declining at an accelerated pace.