Incidents:
Valin Steel announced its 2023 annual report on March 30, 2024: In 2023, the company achieved total operating revenue of 164.465 billion yuan, a year-on-year decrease of 2.47%, and realized net profit to mother of 5,079 billion yuan, a year-on-year decrease of 20.38%.
Investment highlights:
Profits are among the highest in the industry. In 2023, the company achieved operating income of 164.465 billion yuan, a year-on-year decrease of 2.47%, and realized net profit to mother of 5.079 billion yuan, a year-on-year decrease of 20.38%. The year-on-year decline in the company's net profit to mother was mainly affected by macroeconomic sentiment, the industry's own supply and demand, and relatively strong raw material prices. The weighted ROE for 2023 was 9.87%, and the balance ratio at the end of 2023 was 51.67%. In a situation where the overall efficiency of the steel industry declined significantly, the company's performance steadily ranked at the top of the industry. In 2023, the subsidiaries Valin Henggang and Auto Board achieved net profit of 842 million yuan and 2,474 million yuan respectively, with year-on-year increases of 20.47% and 49.78% respectively, supporting the company's profits.
Fee control enhances operating efficiency, and the steady increase in R&D rates helps to make products high-end. The company's expense ratio for the 2023 period was 5.51%, +0.38pct year on year. The year-on-year increase in expenses during the period was mainly due to a significant increase in R&D expenses. The company's R&D expenditure rate in 2023 was 4.2%, up 0.33pct from 2022.
Extreme benchmarking to reduce costs and increase the efficiency of the entire system. In addition to continuously reducing process costs and keeping financial costs low, the company is also strengthening secondary energy recycling by adhering to the four principles of “optimal iron and water cost, low inventory, finish+economic material policy, and accurate benchmarking”, further strengthening procurement cost competitiveness and continuously reducing energy costs. Multiple cost reduction paths go hand in hand, providing the company with a powerful tool to stabilize profits during deep industry adjustments.
Product applications have blossomed in many places, and a variety of high-end layouts. The company has established a leading edge in segments such as energy and oil and gas, shipbuilding and offshore engineering, high construction and bridges, construction machinery, and new energy and new materials. In 2023, the company added 30 new “alternative imports”, and the sales share of key varieties of steel increased to 63%, +3pct compared to 2022, speeding up the transformation of products from “premium steel” to “special steel”. Meanwhile, in 2023, the company focused on expanding overseas markets such as the Middle East and Southeast Asia, exporting 1.56 million tons of steel throughout the year, an increase of 26.04% over the previous year.
Most of the new production capacity and production line upgrades have already been put into operation, and 2024 will usher in a period of performance release. The subsidiary VAMA automotive plate phase II project was successfully put into operation in April 2023, adding 450,000 tons of annual production capacity for high-end automotive steel; projects such as the first phase of Hualing Liangang Cold Rolled Silicon Steel were officially put into operation at the end of August 2023, forming 200,000 tons of finished unoriented silicon steel products and 90,000 tons of semi-finished oriented silicon steel products; Valin Xianggang's premium high-speed wire transformation project is expected to be fully put into operation in 2024. The “Premium” production line equipment for wire rods will be further strengthened. With the implementation of the company's precise production expansion layout, we expect 2024 to release performance and further consolidate our market position.
We expect the steel price trend to be weak and volatile in 2024. On the supply side, the National Development and Reform Commission, the Ministry of Industry and Information Technology and other departments will continue to carry out national crude steel production adjustment work in 2024, and crude steel production may be tightened in 2024. On the demand side, dragged down by real estate, demand for construction steel is still weak; demand for shipbuilding and wind power is booming; demand in the automotive industry is stable, with new energy vehicles continuing to be booming; and demand for the electrical steel and oil and gas industries remains at a good level. In March 2024, the State Council of China issued the “Action Plan to Promote Large-scale Equipment Renewal and Consumer Goods Trade-In”, which proposes the implementation of four major actions: equipment renewal, consumer goods trade-in, recycling, and standard upgrading. If the plan is implemented and effective, demand in the steel industry is expected to be repaired in 2024. The overall fundamentals of supply and demand remain strong and weak, but the structural differentiation of steel consumption will further increase.
As a regional leader, the company adheres to market orientation, is customer-centered, expands effective and high-end supply, and has established a leading edge in many fields. With the release of new production capacity, production line upgrades, combined with domestic economic recovery and industrial structure upgrading, we expect to achieve operating income of 1678.8/1744.0/178.99 billion yuan in 2024-2026, 2.1%/3.9%/2.6% year on year, respectively; achieve net profit of 60.5/67.4/7.15 billion yuan, up 19.1%/11.5%/6.0% year on year, corresponding PE is 6/6/5 times. We are optimistic that the company's variety structure will continue to be advanced, continue to consolidate its leading edge in segmented fields, have strong ability to withstand risks, cover for the first time, and give it a “buy” rating.
Risk warning: Policy adjustments exceed expectations; macroeconomic growth falls short of expectations; company project construction progress falls short of expectations; raw material prices fluctuate; downstream demand falls short of expectations; risk of falling product prices.