Event: The company released the third quarter results announcement. The company achieved total revenue of 122.072 billion yuan in the first three quarters of 2023, -3.66%, net profit of 4.105 billion yuan, -20.0%; in the Q3 single quarter, the company achieved total revenue of 40.715 billion yuan, +1.25% year-on-year, +2.66%; net profit of 1,537 billion yuan, +17.33%, -18.24% month-on-month.

Operating performance was still steady, and cost control effects were outstanding, and the increase in R&D expenses dragged down profit performance month-on-month. The company's gross profit for the 2023Q3 quarter was 4.585 billion yuan, +17.96% year on year and +3.66% month on month. The company continued to deepen cost control measures. While the scale of revenue continued to expand, Q3 operating costs were -0.14% year over year. In addition, the company continues to promote the product structure upgrade strategy, and R&D investment continues to increase. The 2023Q3 R&D expenses in a single quarter reached 1.75 billion yuan, and the R&D expenditure rate was 4.29%, +0.36 pct over the previous month and +0.41 pct year-on-year, which in turn dragged down the company's profit performance on a month-on-month basis.

The industry has outstanding risk resilience, and the strategic advantages of product structure upgrading are constantly being highlighted. In terms of exports, this year's steel market demand is characterized by weak domestic demand but strong exports. According to data from the China Steel Association, steel production in the first three quarters of this year was +1.7%, while exports were +32% year on year. Increased steel exports and rising demand for steel used in the domestic manufacturing industry became the main driving force supporting this year's steel industry output growth. According to data disclosed in the company's 2023H1 results announcement, the company's gross export profit accounted for 10.31% (8.75% in 2022), and the company may continue to actively promote the steel export sales strategy in the third quarter. At the high-end level, according to the China Steel Association, demand for high-end steel has continued to rise since this year, and the amount of steel used in manufacturing industries such as ships, automobiles, home appliances, and new energy fields such as wind power and photovoltaics has increased markedly. Electrical steel production in the first three quarters was +14.3% year on year, and hot-rolled sheet production was +18.2% year on year; in terms of export varieties, the export share of high value-added products such as hot/cold rolled also increased markedly. On the company side, the sales volume of 2023H1 steel was 8.54 million tons, accounting for 63%, an increase of 3 pct over the full year of last year. Among them, the top 3 demand industries for key steel varieties are automobiles (18.7%), energy and oil and gas (16.4%), and bridges and construction (11.8%). 2023H1 has achieved domestic replacement imports of 8 types of steel in 5 categories of products, achieved multiple customer development and product development in wide and thick plates, cold rolled and seamless steel pipe products, and continued to differentiate the product structure towards high-end quality products.

Plans for the renovation and upgrading of old equipment have been released, and the low-carbon environmental transformation continues to advance. Low-carbon environmental protection is the main theme of the future sustainable development of the steel industry. As the industry's environmental requirements continue to rise, the company follows industry trends. Valin Liangang plans to invest 1.07 billion yuan to implement the ironworks sintering machine energy saving and environmental protection upgrade project. After the project transformation is completed, it is expected that production costs will be further reduced, labor productivity will be increased, and pollutant emissions will be reduced; at the same time, Valin Liangang plans to invest 550 million yuan to build an environmental transformation and upgrading project for the old integrated steel mill. After the completion of the project transformation, it is expected that environmental protection transformation and upgrading of open-pit yards will be accelerated, air pollution will be reduced, and implementation will be promoted. Clean production.

Profit forecast and investment advice: As a regional board leader, the company's ability to withstand risks in a contrarian environment is outstanding. Its operating performance is remarkable. The transformation path of high-end products continues to advance, and the industry's performance is expected to maintain steady development throughout the year against the wind. Considering the obvious increase in short-term costs and the steady growth in the scale of the steel industry in the future, we lowered our previous profit forecast and estimated that the company's net profit for 2023-2025 would be 54.82/59.41/6406 billion yuan, EPS at 0.79/0.86/0.93 yuan, and the closing price corresponding to PE on November 2 would be 7.2/6.6/6.1 times, respectively, maintaining the “increase in holdings” rating.

Risk warning: raw material prices fluctuate greatly, industry demand falls sharply, etc.