Core highlights: As a leading domestic steel company, the company leads the world in sales in high-end product fields such as automotive plates and electrical steel, and relies on Baowu Group's continuous expansion. The company's historical profitability ranks among the highest in the industry, and costs still have significant downside. The main products are in a favorable competitive position while also having scarce capacity expansion attributes. In the context of product structure optimization and the return of the industry to profit in a short period of time, profit improvements are worth looking forward to. Currently, the ratio of the company's market value to replacement cost is significantly undervalued and has significant strategic investment value.

Long-term demand in the steel industry is stable, and the structure has been further optimized: just as Guosheng Steel's annual strategy report “Towards Maturity” suggests that per capita steel production exceeds 600 kilograms, which means that China has entered a mature period of industrialization. Structurally, with the decline in the major cycle of fixed asset investment, the increase in the share of the consumer service industry is an inevitable result of economic development. At the same time, industrial metals entered a long-term period of decline, but due to the unusually long period of recession, overall stability has become the main theme for the future development of the industry. In line with the major trend of economic transformation, the domestic steel consumption structure continues to be optimized.

The proportion of steel used in investment has declined further, and the proportion of steel used in manufacturing has continued to rise. The process of structural transformation is accompanied by changes in the competitiveness of enterprises. During this period, manufacturing-oriented and export-oriented steel grades have become more competitive.

Production capacity and profitability are among the highest, and there is huge room for green collaboration to reduce costs: most of Baosteel's product structure is mainly steel used in manufacturing industries such as plates. Among them, plates, strips and pipes account for more than 90%, which is in line with the future development trend of the industry.

It ranks among the highest in the industry in terms of historical profits in tons of steel, and the per capita steel production efficiency ranks first in the industry. By developing green and low-carbon steelmaking, process cost reduction, and multi-base collaboration, the company still has significant room for cost decline in the future, and profitability is expected to continue to increase.

Short-term economic recovery helps increase capacity utilization: with the return of consumption rates and the expansion of fiscal policies, the short-term cycle is neutral. The capacity utilization rate of the steel industry is expected to return to around 85% in 2024, an increase of around 1% over the previous year. If the economy rebuilds inventories during this period, the capacity utilization rate may reach a higher level.

The industry has further contributed to the cyclical improvement of corporate profits.

The company's valuation is in the undervaluation stage, and scarce growth attributes and high-end products enhance profitability. Judging from the ratio of comparable company market value to the original fixed asset value, Baosteel Co., Ltd.'s high valuation level in the past five years is around 0.61 times, and the central level is about 0.40 times, currently only 0.25 times. The recovery in market sentiment is expected to drive continued upward valuation repair; the company's production capacity expansion space in the past three years is expected to exceed 50% in the context of current industry capacity control policies. Compared with Japan's experience, the company is expected to achieve scale effects and efficiency improvements through continuous mergers and restructuring; the company maintains a leading position in technology in high-end products and continues to improve electric steel through automobile board structure optimization With the expansion of production, the subsequent product structure is expected to continue to be high-end, and long-term profitability will be further improved.

Investment advice. The company is the leader in the industry, focusing on high-end special board manufacturing, benefiting from mergers and restructuring attributes, high-end product structure, and significant cost reduction space. We expect the company's net profit to continue to improve from 2023 to 2025 to be 12.01 billion yuan, 13.18 billion yuan, and 14.35 billion yuan. Referring to the company's valuation changes over the past three years, we believe that the company's valuation has obvious room for repair. The central valuation region corresponds to a market value of about 234.2 billion yuan in the past three years. The market value of the high-value area corresponds to a market value of about 354.6 billion yuan, covering for the first time, giving it a “buy” rating .

Risk warning: Prices of upstream raw materials have risen sharply, steel demand and output scale estimates may be biased, and there is uncertainty about new business development.