2023 results are in line with our expectations

The company announced 2023 and 1Q24 results: 2023 revenue of 122.74 billion yuan, -14.4% year on year; net profit to mother of 1,084 billion yuan, -22.3% year on year. 1Q24 revenue was 29.75 billion yuan, -6.6%/+9.8% YoY; net profit to mother was 159 million yuan, -37.6%/-43.0% YoY. The company's FY23 and 1Q24 results are in line with our expectations.

1) Steel production and sales declined slightly, and profitability showed resilience. In 2023, the company's steel production/sales volume was -5.4%/-7.1% year-on-year to 2685/26.51 million tons, a slight decline compared with '22. We estimate that the sales price/gross profit per ton of steel was -515/-20 yuan/ton to 3986/432 yuan/ton, respectively, and the gross margin was +0.75ppt to 11.2% year over year. The company's product cost conductivity is good, and the profitability of steel is still stable at the bottom of the boom. 2) Sales of vanadium products rebounded, and gross margin declined slightly year-on-year. Sales volume of vanadium products was +17% year-on-year to 14,000 tons, the price of a single ton was -23.4% to 941,000 yuan/ton, and gross margin decreased slightly by 3.8ppt to 17.8% year-on-year. 3) There was a slight increase in the cost rate during the period. In '23, the company's finance/management/sales expense ratios were 4.86%/2.33%/0.06%, respectively, +0.96/+0.11/+0.01ppt, respectively, a slight increase over the previous year. 4) Operating cash flow improved significantly. 2023/1Q24 Net operating cash flow was RMB 11.2/3.14 billion, +21.4%/+1.3% YoY, mainly due to improved capital management capabilities and an increase in accounts receivable recovery rate.

Development trends

The bottom of the industry shows steady profitability and is optimistic about the gradual recovery of the company's profit cycle. The fundamentals of the steel industry have improved marginally since 2Q24, and the steel industry's profit cycle is expected to recover: 1) We observed that the year-on-year decline in apparent steel consumption narrowed, demand showed strong resilience, and inventory was rapidly erased. 2) Forward-looking demand indicators have improved, manufacturing PMI is expanding, and orders for auto parts and machinery are improving. 3) Domestic equipment upgrading and consumer goods trade-in policies are progressing steadily. The trillion-dollar treasury bond project is about to begin, demand for steel in manufacturing and infrastructure is expected to improve, and the company's profit cycle is expected to recover.

With the green transformation of the layout and continuous optimization of the product structure, the moat is expected to continue to deepen. 1) In 23, the company successfully achieved stable production of the world's first 1.2 million ton hydrogen metallurgy demonstration project. At the same time, its Tang Steel, Hanbao base, and medium and heavy plate companies have all achieved A environmental performance. In the context of dual energy consumption control and carbon reduction, we believe that the company's green environmental protection advantage will gradually be transformed into a profit advantage. 2) The product structure continues to be optimized. Sales of the company's key products increased 8.2% year-on-year in '23, supporting product gross margins to remain steady during the downward cycle. We are optimistic that in the future, the company's moat will continue to deepen, its competitive advantage will expand, and the company's valuation center will rise.

Profit forecasting and valuation

Considering that the industry's profit cycle is expected to recover, we raised 24e net profit of 3.1% to RMB 1,515 billion, and introduced 25e net profit of RMB 1.95 billion. The company's current stock price corresponds to 24/25e15.1x/11.7x P/E. We maintain a neutral rating, considering that the industry sentiment is expected to recover, and keep the target price of 2.72 yuan unchanged, corresponding to 24/25E 18.1x/14.3x P/E, implying 23% upward space.

risks

The real estate boom has surpassed expectations, and the global economy is declining at an accelerated pace.