Incident Overview: The company released its 2023 annual report: In 2023, the company achieved revenue of 164.465 billion yuan, a year-on-year decrease of 2.5%; net profit to mother of 5.079 billion yuan, a year-on-year decrease of 20.4%; net profit after deducting non-return to mother of 4.68 billion yuan, a decrease of 24.7% year-on-year. With 2023Q4, the company achieved revenue of 44.194 billion yuan, a year-on-year increase of 0.9% and a month-on-month increase of 8.5%; net profit to mother of 974 million yuan, a decrease of 22% year-on-year and a decrease of 36.6% month-on-month; net profit after deducting 683 million yuan, a year-on-year decrease of 45.4% and a month-on-month increase of 54.7%.
Comment: Production and sales increased, gross margin declined
① Volume: The company's production and sales volume increased steadily in 2023. The company produced 25.94 million tons of steel products in 2023, a year-on-year decrease of 2.37%, and sales volume was 26.53 million tons, up 0.07% year on year.
② Price: Raw material costs fluctuate at a high level, and the company's gross margin declined throughout the year. The 2023 Hot Roll price fell 16.95% year over year. Among the main raw materials, although the annual average price of iron ore market was -0.01%, the price of coke was -0.28%, the price of main coking coal was -0.14%, and the price of scrap was only -0.1% year-on-year. Due to high fluctuations in the cost of raw materials such as coke, energy prices rose, while steel prices fell, and the company's gross margin fell 0.92 pct to 9.40% in 2023. On a quarterly basis, 2023Q4's gross margin was 8.17%, down 0.84 pct year on year and 1.77 pct month on month.
Future core highlights: regional leaders, production line upgrades to speed up the high-end transformation process ① regional leader, southern quality steel production base. The company has production bases in Xiangtan City, Loudi City, Hengyang City in Hunan Province, and Yangjiang City in Guangdong Province. The product structure is complete and the downstream covers a wide range of industries. In 2023, the company sold 16.83 million tons of key steel varieties, accounting for 63%; exported 1.56 million tons of steel throughout the year, an increase of 26.04% over the previous year. The company has created a number of “invisible champion” products in market segments, which has driven the transformation of the product structure from homogenization of the middle and low end to the differentiation of high-end quality products.
② The company accelerates the restructuring and upgrading of production lines. First, technical improvement projects such as the full thermal load test run of the Valin Xianggang High Speed Wire Reconstruction Project and the second phase of the bar refining line are progressing in an orderly manner and are expected to be fully put into operation in 2024. Second, Valin Liangang Cold Rolled Silicon Steel Phase 1 and other projects were completed and strengthened, resulting in 200,000 tons of finished production capacity of finished unoriented silicon steel products, 90,000 tons of semi-finished silicon steel products, and subsequent project development; at the same time, the second phase of the cold-rolled silicon steel product project progressed in an orderly manner. Third, Valin Henggang's production line upgrade project is progressing at an accelerated pace. Fourth, the second phase of the VAMA automotive board project was successfully completed and put into operation, adding 450,000 tons of high-end automotive steel production capacity per year to further meet the rapid development needs of the NEV sector.
Investment advice: As a leading enterprise in Hunan, the company's product structure is continuously optimized and upgraded, compounded by the gradual recovery of the domestic economy to drive a recovery in profits of tons of steel. We expect the company to achieve net profit of 57.03/67.17/7142 billion yuan respectively in 2024-26, corresponding to the closing price on March 29. PE is 6, 5, and 5 times, respectively, maintaining the “recommended” rating.
Risk warning: Prices of raw materials fluctuate at a high level, downstream demand falls short of expectations, and production capacity falls short of expectations.