2023 results fell far short of our expectations
The company announced 2023 results, achieving revenue of 113.50 billion yuan, -13.4% year-on-year, and net profit to mother of -326 billion yuan, or -2188% year-on-year. Among them, 4Q single quarter revenue was 29.21 billion yuan, -3.3% year-on-year, and net profit attributable to mother was 1,142 billion yuan. Due to weak industry demand and high raw material prices, the company's steel prices fluctuated downward, and the performance fell far short of our expectations.
1) Steel production and sales remain flat, and falling prices are putting pressure on profits. The company's annual steel production and sales volume was 2460/24.85 million tons, +0.1%/-3.7% YoY. We estimate that the company's annual sales price/ton steel gross profit/ton net profit was 4559/-22/ -131 yuan/ton, respectively, 518/-140/-137 yuan/ton, of which hot-rolled/cold-rolled/medium and heavy plate gross margins were -1.3/-4.0/ -2.1ppt to 1.6/-3.1%, respectively. 2) The cost of a ton of steel continues to improve. The company's 23-year steel cost was -7.4%/to 4,581 yuan/ton. Among them, raw material costs dropped significantly, and the raw material cost/cost ratio for tons of steel was -11.3% /-3.4ppt, respectively. 3) The capital structure is good, reflecting steady operation. At the end of 2023, the company's balance ratio/net debt ratio was 42.9%/12.5%, +3.6/+0.9ppt compared to the same period. Compared with peers, it maintained a low level, and the operating stability was strong. 4) Decrease in operating cash flow. The company's net operating cash flow for 23 years was 1,579 billion yuan, -74.3% year-on-year, mainly due to the decline in net profit due to the decline in industry sentiment.
Development trends
The manufacturing and construction industries continue to diverge, and panel profits are expected to recover. We observed that real estate commencement and sales declines continued to expand in early '24, exceeding market expectations. Judging from data on construction end types such as thread, cement, and asphalt, the real estate boom is clearly dragging down demand for construction steel. In comparison, the manufacturing boom is strong. The amount of fixed asset investment in the manufacturing industry was +9.4% year-on-year in January-January '24, and the downstream output of the automobile/home appliance manufacturing industry all recorded positive growth. We expect the long-term market differentiation pattern to continue. After raw materials weaken, we are optimistic that the spread between plate purchases and sales will expand, and the company's profits as a steel company with a focus on plate are expected to recover.
Product structure optimization has progressed steadily, and new breakthroughs have been made in the export of various steels. 23 years of focus on upgrading the product structure: the company's high-magnetic-oriented silicon steel production was +20% year-on-year, and automobile steel/heavy rail sales were +12.2%/+14.85%, respectively. Thanks to the optimization of the company's product structure, overseas sales grew steadily, and the annual export order volume was +33.85% year-on-year. Export value/export share was +18.2% +1.7ppt to 7.16 billion yuan/ 6.31% year-on-year respectively. The company's product advantages are remarkable in the industry. As the company continues to increase its R&D and sales efforts for various steels, and deepens cost reduction and efficiency, the company can be expected to recover profits in 24 years.
Profit forecasting and valuation
Considering that the company's profit fell short of expectations and that the real estate boom dragged down industry demand, we lowered 24e's net profit to mother by 98.5% to $37 million, and introduced 25e net profit to mother of 964 million yuan. The current A/H shares correspond to 24e and 25e P/B, which are 0.4x/0.2x and 0.4x/0.2x, respectively. The target price for A shares was lowered by 20.0% to $2.8. Considering the large fluctuations in the Hong Kong stock market, the target price for H shares was lowered by 40.0% to HK$1.5, corresponding to 24e and 25e P/B to 0.5x/0.2x, respectively, implying 16%/15% upward space.
risks
The real estate market declined further; the global economy accelerated its decline.