Key points of investment:

The product structure continues to be optimized to continuously consolidate the leading edge in the market segment.

Aiming at the direction of high-end transformation in the industrial steel sector, the company continued to increase R&D investment. In 2022, the company invested 6.453 billion yuan in R&D, accounting for 3.84% of total revenue. The company's products have achieved remarkable results in reaching high-end products, and various types of steel such as wide and thick plates, hot-rolled plates, and automobile plates have established differentiated competitive advantages in segmented fields. Sales of “high added value, high technical content, high profitability to meet the individual needs of customer terminals” have achieved steady growth and have become the company's main product.

Fee control has achieved remarkable results, and lean management has taken solid steps.

The company's ability to control costs continues to improve, and the three rates continued to decline. In the first three quarters of 2023, the company's sales expenses ratio, management fee rate, and financial expense ratio were 0.26%, 1.11%, and 0.02%, respectively, and the three rates remained low. The company's balance ratio has declined steadily in recent years. As of Q3 2023, the company's balance ratio was 51.79%. Financial expenses for the first three quarters of 2023 were 121 million yuan. Compared with financial expenses of 1,679 million yuan in 2018, the company's debt structure has been greatly optimized, and cost control results have been remarkable.

The relationship between supply and demand in the steel industry has improved, and steel companies' profits may bottom out and usher in a recovery.

Supply-side reforms are expected to achieve more significant results, and expectations for steel industry policy production control in 2024 will be further strengthened. On the demand side, in the context of China's economic recovery, infrastructure is an important support for steady economic growth. Steel sectors such as automobiles, ships, and home appliances continue to contribute to growth, and real estate is bottoming out at an accelerated pace under policy guidance. Total steel consumption is expected to stabilize in 2024. Along with factors such as the improvement in the relationship between steel supply and demand and the development of steel products in the direction of high-end and high added value, steel companies' profits may bottom out and usher in a recovery.

Profit forecasts and investment suggestions:

As a leading steel company in the central and southern regions, the company has established a leading edge in some segments. The company was able to maintain relatively stable profits during the bottom of the industry's profit period. It has proven its ability to withstand risks many times. In addition, the assessment of state-owned listed companies is being optimized and improved. The company is expected to pay more attention to increasing dividends to return shareholders. We believe there is room for further restoration of the company's valuation level. Referring to the company's historical valuation, considering that the company's long-term performance is undervalued, and the valuation is expected to be gradually repaired, 7.5 times PE in 2024 was selected as the basis for the company's valuation. We expect the company's net profit to be 59.06/62.8/7.679 billion yuan in 2023-2025, and the corresponding EPS is 0.85/0.91/1.11 yuan/share. According to 2024, 7.5 times PE, corresponding to the target price of 6.82 yuan, the first coverage will give the company a “buy” rating.

Risk warning

(1) Steel prices fell short of expectations; (2) the company's product structure upgrade fell short of expectations; (3) raw material prices and costs rose beyond expectations.