Matters:
Honglu Steel issued an announcement on important matters: 1) Changing the dividend plan, increasing the dividend rate from 15% to 30%; 2) New orders of 6.965 billion yuan were signed in 24Q1, -3.33% over the same period last year.
Commentary:
The 2023 dividend plan was changed, and the dividend rate was raised to 30%: In order to enhance the sense of acquisition among investors, especially small and medium-sized investors, and fulfill the social responsibilities of listed companies, the company decided to change the 2023 profit distribution plan. The cash dividend dividend per share was raised from 0.26 yuan to 0.52 yuan, and the total dividend rate was raised from 179 million yuan to 357 million yuan. The dividend rate was raised to 30%. Based on the closing price on April 8, 2024, the dividend rate was 3%.
The growth rate of new Q1 orders was affected by raw material prices: the company signed a total of 6.965 billion yuan of new contracts in 2024Q1, -3.33% over the same period last year, all of which were material orders. We estimate that the average price of 24Q1 board was 4,565 yuan, -5% compared to the same period. Considering the company's “material fee+processing fee” pricing method, we believe that the decrease in Q1 order amount may be related to the decline in raw material prices. In terms of output, the 24Q1 company's steel structure output was about 917,900 tons, up 0.09% from 2023Q1, and the growth rate slowed sharply by about 20 pcts month-on-month compared to 23Q4. We think it may be related to the weak start of investment projects such as infrastructure, real estate, and manufacturing in Q1.
The manufacturing PMI has returned to the expansion range, and the bottom of the industry volume and price range may now be: the company's output increased by nearly 30% in 2023, but the profit per ton continued to decline. We estimate that the net profit per ton after deduction in 2023 was about 205 yuan, the year-on-year -72 yuan, the lowest value since 2019. Net profit after deducting non-ton in 23Q4 fell further to 139 yuan. We think the main factors are: 1) raw material prices continue to decline, leading to a decline in revenue per ton; 2) the company's raw material costs are calculated using the weighted average method. After the scale was expanded, there was a large inventory, and the decline in steel prices caused gross profit loss.
Furthermore, we believe that weak demand side prosperity may also be one of the important factors leading to large deviations in production performance and profit performance. According to the Bureau of Statistics, the manufacturing PMI was 50.8% in March, returning to the expansion range. In terms of cost, plate prices have also hovered between 4,500 yuan and 4,700 yuan/ton for four consecutive quarters. We believe that the bottom of the industry volume and price range may have appeared, and marginal changes on the demand side are expected to bring considerable profit elasticity. The company's current PE (TTM) is only 10x, while the lowest value in history in the past ten years is 8.7x, with limited downside.
R&D investment has increased dramatically, but the cost per ton is still well controlled. The company's comprehensive gross margin in 2023 was 11.23%, -0.84pct year on year, with a single Q4 gross margin of 10.87%, which is at a low level in the same period in history, only slightly superior to 22Q4. Net profit margin of 5.01%, -0.85pct year over year. In terms of costs, the company's R&D expenses increased 52% year on year to 700 million yuan in 2023, but the overall period rate only increased by 0.37 pct, and the cost per ton was even -12 yuan year over year, mainly due to the significant reduction in other expenses after the sharp increase in production. Net operating cash flow was $1,098 million, a year-on-year increase of $475 million.
Investment advice: Considering that raw material prices and profits are still low, we conservatively expect the company's 2024-2026 EPS to be 1.94/2.20/2.48 yuan/share, and the corresponding PE is 9x/8x/7x. According to the historical valuation method, the company was given a valuation of 10-12x in 2024, with a target price range of 19.4-23.3 yuan/share, maintaining a “strong” rating.
Risk warning: The downward pressure on the economy is increasing, raw material prices fluctuate sharply, and market demand falls short of expectations.