1Q24 results fell short of our expectations
The company announced 1Q24 results: revenue of 37.05 billion yuan, -7.1/ -16.2%, net profit to mother of 390 million yuan, 43.1/ -59.8% month-on-month. The company's performance declined slightly from month to month. The main reason is that 1Q24 steel's fundamental restoration was weak, and the company's performance fell short of our expectations.
1) The 1Q24 industry boom bottomed out for the second time, and the purchasing and sales gap narrowed, putting pressure on the profitability of steel. The company's 1Q24 gross margin was -1.5/-2.2ppt to 6.2% year on year. The main reason was that the sharp decline in industrial chain prices caused scissor differences and eroded the profits of the steel industry. We simulated the gross profit (instant) of thread/hot-rolled tonne steel from -371/-292 yuan to -82/-184 yuan year over year. 2) There was a slight increase in the cost rate during the period. The cost ratio for the 1Q period was +0.2/+0.3ppt to 1.6%, of which the management expense ratio was +0.1/+0.3ppt to 1.1% month-on-month, and the sales/finance expense ratio was basically the same. 3) The asset structure remains stable and operating cash flow has improved. The balance ratio was 53.29%, -0.02/+1.62ppt; operating cash flow was 184 million yuan, an increase of 23.3/3.61 billion yuan, respectively. Among them, cash received from sales of goods to provide services and cash received from purchasing goods to receive labor payments were -19.7%/-32%, respectively, and the company's procurement costs decreased significantly.
Development trends
The competitive advantage of core assets is still significant, and short-term profit fluctuations are dangerous and even more of an opportunity. 1) The share of high-value-added steel varieties is increasing year by year. Varied steel sales/sales accounted for +6.0% /+3.6ppt to 16.83 million tons/ 63.5% in 2023. We are optimistic that the company's profit will further improve with the volume of high-end products. 2) Deeply cultivate market segments, and brand recognition continues to increase. Silicon Steel Phase I & Auto Board VAMA Phase II were successfully put into operation in '23, adding 200,000 tons of unfetched +90,000 tons of oriented silicon steel and 450,000 tons of high-strength automotive board production capacity; breakthroughs were made in ship board technology research, and the proportion of extra-thick plate products was or further increased. We believe that the decline in the company's 1Q profit is more due to a sharp drop in prices in the industrial chain. The company's competitive advantage is still significant, and 2Q profits are expected to recover significantly.
Industry fundamentals have improved marginally, and steel core asset profits and valuation repairs can be expected. 1) Marginal improvements in the fundamentals of the steel industry since 2Q24: the year-on-year decline in steel consumption has narrowed, and industry demand has shown strong resilience; at the same time, inventories of the five major types of steel have maintained a relatively rapid rate of elimination. Looking ahead, the inventory cycle is expected to resonate with the recovery in demand, further promoting steel demand and profit cycle recovery. 2) Forward-looking indicators sent a positive signal: the manufacturing PMI showed an expansion trend in March, with orders for cutting tools, auto parts and machinery improving; domestic equipment upgrading and consumer goods trade-in policies progressed steadily, and the trillion treasury bond project is expected to be implemented to form a physical workload. We believe that demand for steel in manufacturing and infrastructure is expected to improve, and the company's profit and valuation repair as a core asset of the manufacturing industry can be expected.
Profit forecasting and valuation
Considering profit resilience at the bottom of the company's boom, we kept 24e/25e net profit unchanged. The current stock price corresponds to 24/25e 7.0x/5.7x P/E, keeping the industry's performance rating and target price unchanged at 7.6 yuan (corresponding to 24/25e 9.2x/7.5x P/E), implying 31.9% upward space.
risks
The real estate economy declined more than expected; the global economy accelerated its decline.