Incident: The company recently announced the construction progress of the 2023 non-public offering fund-raising project. Among them, the “technical transformation project for processing 350,000 tons of wide precision stainless steel sheets per year” implemented by Guangdong Yongjin Company has all been put into operation, and the “annual processing 220,000 ton precision stainless steel strip project” by Yongjin, Gansu will be postponed.

The Vietnam and Jingjiang projects are progressing steadily, and the Gansu project is to be slowed down. A number of projects under construction, such as the Jingjiang Yongjin “Project to Process 1.2 Million Tons of High Quality Wide Stainless Steel Strips a Year” and Vietnam's “Project to Process 260,000 Tons of Precision Stainless Steel a Year” are in the process of continuing. Gansu Yongjin plans to extend the planned completion date of the second production line of the first phase of the “220,000 ton precision stainless steel strip processing project” project until March 31, 2025. The second phase of the project is scheduled to begin after the completion of the first phase of the project.

The Vietnamese project has good benefits and strong profitability. As of September 30, '23, the Vietnamese subsidiary achieved revenue of $202 million, net profit of $117 million, and a net interest rate of 5.8%, which is higher than the company's overall net interest rate of 4.2 PCT for the first three quarters.

To meet Vietnam's growing demand for stainless steel, the company plans to invest US$125 million to build a new production capacity of 260,000 tons.

Construction of the first phase began in the first half of this year and is expected to be put into operation in the second quarter of 2024.

Equipment renewal and trade-in may drive demand for cold-rolled stainless steel to pick up. According to the Metallurgical Industry Planning Research Institute, the adoption of large-scale equipment upgrades and consumer goods trade-in policies will drive steel consumption to increase by about 5 million tons per year, mainly driving consumption of steel varieties such as stainless steel sheets, silicon steel, automotive cold-rolled sheets, galvanized sheets, seamless pipes, and premium steel bars and wires.

The new materials business is getting closer and is expected to become a new profit growth point. It is expected that the 15,000 ton titanium alloy production line and the 75,000 ton cylindrical battery case production line will be put into trial production in the first quarter of '24. It plans to take control of Minle Pipe Industry in September '23, and completed share registration at the end of October '23 to strengthen the stainless steel water pipe business layout.

Considering the weak recovery in domestic demand since 23 years and the slowdown in the company's production capacity expansion, we lowered the company's product sales price and gross margin assumptions and predicted that the company's earnings per share for 2023-2025 would be 1.23 yuan, 1.60, and 2.02 yuan (originally 1.97, 2.70, and 3.37 yuan), respectively. Based on the comparable company's 13X PE in 24, corresponding to a target price of 20.80 yuan, a purchase rating was given.

Risk warning

The macroeconomic growth rate has slowed, the company's new construction project capacity has been released or cannot be absorbed as expected, there is a risk that the profit level of new products will fluctuate, and upstream smelting capacity investment falls short of expectations.