3Q23 performance is slightly lower than we expected.

The company announced 3Q23 performance: revenue of 31.298 billion yuan, same/month-on-month-17.7/-3.7%, net profit of parent company of 294 million yuan, same/month-on-month +55.7/+14.9%, 3Q raw material end price high erosion part profit superimposed 3Q investment income slightly increased, the company's performance was slightly lower than our expectations.

1) Affected by the weakening of steel price month-on-month, 3Q revenue declined. 3Q industry supply has not declined significantly, demand recovery is still slow, supply and demand slightly unbalanced under the weakening of 3Q steel prices, 3Q we track the main steel varieties thread and hot rolling month-on-month-1.8%/-0.1% to 3751/4022 yuan/ton, we believe that the steel price decline is the main reason for the decline in 3Q company revenue. 2) High raw material prices erode profits. The operating profit of the company's 3Q operating business increased from-29.5% to 84 million yuan, mainly due to the tight supply and demand of raw materials and the increase of 3Q cost pressure due to the overall downward price of 3Q industrial chain. Our simulated 3Q deformed steel/hot rolled steel gross profit per ton (real-time) from-145/-83 yuan to 84/20 yuan year-on-year. 3) Rates remain stable during the period. During the 3Q period, the expense ratio of the company was the same as/+1.8/+1.3ppt to 8.5%, among which the sales/management/financial expense ratio was 0.06/2.38/4.87% respectively, which was basically the same as that of 2Q. 4) The asset structure remains stable and the operating cash flow is under short-term pressure. 3Q asset-liability ratio 73.7%, same/month-on-month-0.8/+0.7ppt, net debt ratio 123.1%, same/month-on-month +5.2/-2.2ppt. 3Q Operating cash flow month-on-month-28.4% to 2.12 billion yuan, cash flow month-on-month decline is mainly due to a significant reduction in tax returns received.

Trend of development

Green environmental protection has reached an important milestone and is expected to benefit from a good supply and demand pattern in the region. Tanggang New District/Hanbao Company was rated as an environmental protection A-level performance enterprise in January 2022 and December 2022 respectively. The self-developed multi-process and multi-pollutant ultra-low emission control technology project made the pollutant emission of sintering/pelletizing/coking/ironmaking process better than the national ultra-low emission limit, indicating that Hegang reached the industry leading level in the green manufacturing field.

Under the background of "double carbon", we believe that the strong green manufacturing capability will enable the Company to become the beneficiary of the differentiated production restriction policy in North China, and the Company is expected to further open up the space for cost reduction and efficiency improvement with the recovery of domestic demand.

Profitability at the bottom of the industry is still stable, and the company's profit valuation is gradually repaired under the background of stable growth. The current industry boom and market expectations are at the bottom. The Company has achieved profitability for three consecutive quarters in 23 years, and it shows a trend of stabilization and recovery. The profitability stability is better than that of the industry, showing the competitiveness of the Company. With the recent government "steady growth" signal further clear, superimposed trillion yuan of national debt to downstream demand pull, the company as a leader in North China is expected to benefit, we are optimistic about the company's earnings and valuation after the domestic demand boom out of the trough further repair.

Profit forecast and valuation

Considering the slow recovery of domestic demand, we lowered the net profit of 23/24e by 43.8/37.4% to 10.87/14.7 billion yuan, and the current stock price corresponds to 23/24e 21.3x/15.8x P/E. We maintain the company's neutral rating, considering that the company's earnings are stable and expected to recover after the domestic demand trough, we maintain the target price unchanged (corresponding to 23/24e 24.7x/19.4x P/E), implying 21.4% upside.

Risk

The property economy has fallen further; the global economy has accelerated its decline.