Core highlights: As an advantageous domestic board enterprise, the company's main products are in a favorable competitive position against the backdrop of a long and stable cycle of industry demand and accelerated structural transformation. At the same time, the company's ability to control the four core costs of per capita steel production, per capita salary, depreciation of tons of steel, and the cost of a ton of steel is outstanding, and its ability to withstand risks is outstanding. In line with the return of the industry's short-term profit cycle, profit improvements are worth looking forward to. Currently, the ratio of the company's market value to replacement cost is significantly undervalued and has significant strategic investment value.

The total volume of the industry is stable over a long period of time, and the structure is optimized: Just as Guosheng Steel's annual strategy report “Towards Maturity” suggests that per capita steel production exceeds 600 kilograms, which means that China has entered a mature period of industrialization. Structurally, with the decline in the major cycle of fixed asset investment, the increase in the share of the consumer service industry is an inevitable result of economic development. At the same time, industrial metals entered a long-term period of decline, but due to the unusually long period of recession, overall stability has become the main theme for the future development of the industry. In line with the major trend of economic transformation, the domestic steel consumption structure continues to be optimized. The proportion of steel used in investment has declined further, and the proportion of steel used in manufacturing has continued to rise. The process of structural transformation is accompanied by changes in the competitiveness of enterprises. During this period, manufacturing-oriented and export-oriented steel grades have become more competitive.

Steel leaders in the manufacturing industry have obvious cost advantages: most of the product structure of Nangang Steel Co., Ltd. is mainly steel used in the manufacturing industry, such as plates. Among them, special plates account for more than 50%, special steel long materials account for more than 28%, and premium special steel accounts for more than 80%, which is in line with the future development trend of the industry. In terms of core competitiveness cost control, the overall production cost of domestic steel mills and the selling price of tons of steel have shown clear advantages over major overseas producers and steel companies, and domestic steel prices have always been at the lowest level in major producers. At the same time, when comparing the four core cost control capabilities of domestic long-listed steel companies: per capita steel production, per capita salary, depreciation of tons of steel, and the cost of a ton of steel, Nangang Steel Co., Ltd. ranked among the top domestic plate companies.

Short-term economic recovery helps increase capacity utilization: with the return of consumption rates and the expansion of fiscal policies, the short-term cycle is neutral. The steel industry's capacity utilization rate is expected to return to around 85% in 2024, up around 1% year on year. If the economy rebuilds inventories during this period, the capacity utilization rate may reach a higher level. The industry has further contributed to the cyclical improvement of corporate profits.

The company's valuation is in the undervaluation stage, and structural upgrades combined with CITIC's empowerment help upgrade the business. Judging from the ratio between the market value of comparable companies and the original fixed asset value, the high valuation level of Nangang Steel in the past five years is around 1.22 times, and the central level is about 0.84 times, currently only 0.56 times. The recovery in industry sentiment in the future is expected to drive continued upward valuation recovery; as the company's share of advanced steel materials increases and the return process of returning to state-owned assets continues, subsequent endogenous business growth combined with external special steel is expected to further accelerate the conversion and product upgrading of special steels. The company is expected to achieve collaborative development with CITIC Special Steel and further improve long-term profitability.

Investment proposal: The company focuses on the manufacture of high-end special plates and special steel materials, benefiting from product structure improvements and shareholder empowerment. Referring to the company's valuation changes in the past three years, we believe that the company's valuation has obvious room for repair. The central valuation area in the past three years corresponds to a market value of about 33.7 billion yuan, and the high-valuation area corresponds to a market value of about 49 billion dollars. It was covered for the first time, giving it a “buy” rating.

Risk warning: Prices of upstream raw materials have risen sharply, demand for steel falls short of expectations, and there is uncertainty about new business development.