2023 results fall short of our expectations

The company announced its 2023 results: annual revenue of 164.47 billion yuan, -2.5% year on year; net profit to mother of 5.08 billion yuan, corresponding to profit of 0.74 yuan per share, -20.4% year on year. Due to sluggish demand in 4Q combined with a sharp rise in raw material prices, the company's performance fell short of our expectations.

1) Demand is sluggish, and the company's steel prices have declined slightly. The company's annual sales volume of long material/plate/pipe was 10,40/1431/1.81 million tons, -2.1% /+1.1%/+2.3% year-on-year, and the price of long material/plate/pipe tonnes of steel was 3925/4886/6907 yuan/ton, respectively, -8.8%/-14.9%/-9.2%. 2) High raw material prices erode profits. The company's gross margin for 23 years was -0.9ppt to 9.3% year-on-year, mainly due to tight supply and demand of raw materials and an overall decline in prices in the industrial chain. Among them, gross profit per ton of long material/plate/pipe was 192/748/920 yuan/ton, respectively, and -61/-87/ -117 yuan/ton year-on-year. 3) The rate remained stable during the period, and R&D investment continued to increase. The company's expense ratio was +0.05ppt to 1.36% year-on-year during 2023, and overall remained stable. The ratio of R&D costs/R&D expenses was +6.0% /+0.3ppt to 6.83 billion yuan/ 4.2% year-on-year. 4) The net debt ratio has increased, and operating cash flow is under pressure. The interest-bearing debt ratio in '23 was +19ppt to 29.4% year on year, and net operating cash flow was -44.2% year over year to 5.27 billion yuan, mainly due to declining profits.

Development trends

High-end varieties continue to gain strength, and market segments have obvious advantages. The company's variety steel strategy continues to advance, and the sales volume of variety steels accounted for +6.0% /+3.6ppt to 16.83 million tons/ 63.5%: 1) The first phase of silicon steel was put into operation to complete the silicon steel product puzzle. The first phase of cold-rolled silicon steel was put into operation in August 23, forming 200,000 tons of unoriented +90,000 tons of oriented silicon steel production capacity. We expect that with the completion of Phase I Phase II and Phase II projects, it will help the company achieve the leap from a single silicon steel substrate to full-process high-end silicon steel manufacturing. 2) Continuous release of high-strength automobile panels. The company's automotive panels are technologically advanced in terms of weight reduction and high strength. VAMA Phase II was put into operation in April 23, adding 450,000 tons of production capacity to further meet the development needs of the NEV sector. Auto Board's net profit for the year was +49.8% year-on-year to 2.47 billion yuan, with strong profitability.

Steel's core assets, which have been reinvigorated, have shown a competitive advantage. The company achieved an excess profit of 240.9 yuan/ton per ton of steel compared to the industry in 23 years, demonstrating significant competitive advantages, mainly 1) “strong incentives and hard restraints” to improve management efficiency. The company pays attention to management performance and insists on elimination at the end. Young middle level cadres account for 45%. 2) Comprehensive benchmarking, deepening cost reduction. The company has improved the benchmarking system from the perspective of process, raw materials, energy, and finance, reducing costs and increasing efficiency in all aspects. The gap between internal ore procurement prices and industry benchmarks has narrowed by 62 yuan/ton compared to the previous year. We are optimistic that the company's moat will continue to deepen and the profit advantage of tons of steel will continue to expand.

Profit forecasting and valuation

Considering the decline in the real estate market that exceeded expectations in '24, we lowered 24e net profit of 40.3% to 5.67 billion yuan and introduced 25e net profit of 6.99 billion yuan. The current stock price corresponds to 24/25e 6.4x/5.2x P/E. We are optimistic that profitability will gradually recover under the optimization of the company's product structure. We will keep the industry's performance rating and target price of 7.6 yuan unchanged (corresponding to 24/25e 9.3x/7.5x P/E), implying 43.7% upward space.

risks

The real estate economy declined more than expected; the global economy accelerated its decline.