Core views:

23. Net profit to mother was -2% YoY and +4% YoY in 24Q1, in line with expectations. According to Baosteel's 2023 report and 2024 quarterly report, the company's 23 revenue and net profit to mother were 344.5 billion yuan and 11.9 billion yuan respectively, with year-on-year changes of -6.3% and -2% respectively. 24Q1 revenue and net profit attributable to mother were 80.8 billion yuan and 1.9 billion yuan respectively, +2.8% and +4.4% year-on-year respectively.

Increment+cost reduction. Pugang's leading management resilience is remarkable, and it insists on reasonable and strong dividends. According to the company's annual report, in terms of sales, the company's main steel production and sales volume in 2023 were 5194 and 51.9 million tons, respectively, with a year-on-year average of +4%. 24Q1 iron and steel production was 1187.8, 13.95 million tons, and billet sales volume was 12.524 million tons. In terms of cost reduction, focusing on energy efficiency improvement, logistics cost reduction, and economic furnace materials, etc., cost reductions of 5 billion yuan and 2.2 billion yuan were achieved in 23 and 24Q1, respectively, which strongly supported the company's performance to outperform the industry market. In terms of dividends, the 23-year dividend ratio was 56.77%.

Supply and demand have entered a period of equilibrium, waiting for a moderate recovery. According to Wind, the overall average price of steel in 24Q1 and 24Q2 (as of April 26, 24) was flat, -4% month-on-month, the average price of iron ore -4% and -11% month-on-month, the average price of coke -8% and -7% month-on-month, and the average price of scrap -2% and -10% month-on-month. As of April 26, '24, the profit rate of domestic steel mills was 51%. Taken together, the current cost pressure on the industry has eased, the difference between purchase and sale prices has improved and fixed the industry's profitability, but the risk of low profit margins and cost fluctuations is expected to continue to suppress crude steel supply, while favorable macroeconomic policies will help to moderately repair demand, which is expected to drive a moderate restoration of the supply and demand pattern.

Profit forecasting and investment advice: Give the company a “buy” rating. The company's EPS for 23-25 is expected to be 0.54/0.62/0.68 yuan/share, respectively, and the PE corresponding to the closing price on April 26, '24 is 13/11/10 times. The company is a leading steel state-owned enterprise. Based on its ability to withstand cyclical fluctuations and long-term stable dividend expectations, it is expected to undergo a valuation revaluation. The company will be given a PE valuation of 15 times in 24 years. The corresponding company's reasonable value is 8.17 yuan/share, giving the company a “buy” rating.

Risk warning. The risk of significant fluctuations in raw materials. Downstream demand falls short of expectations. The risk that the crude steel production limit policy exceeds expectations.