1Q24 results are in line with our expectations
The company announced 1Q24 results: operating income of 20.39 billion yuan, -10.3% year on year; net profit to mother - 310 million yuan, +20 billion yuan year on year. The company's 1Q24 performance was in line with our expectations.
1) There is significant differentiation between board strength and weakness, and axle products are growing steadily. 1Q24's steel production and sales volume was 451/32 million tons, -6.4/ -10.2% year on year, and -11.8/ -15.5% month on month, of which plate production and sales were 256/2.5 million tons, +5.8/ +2.9% year on year; long material production and sales were 18.7/1.74 million tons, -20.1/ -25.0% year on year, with significant differentiation in the company's long board production and sales. Axle production and sales were 8/80,000 tons, a year-on-year ratio of 20,000 tons, which was the same month-on-month, and corresponding revenue was +35% compared to the same period last year. 2) Steel prices dropped significantly from month to month, and steel profits were under pressure. The company's sales price/cost/gross profit for 1Q24 tons of steel was 4720/4645/69 yuan, respectively, -171/-93/-79 yuan compared to the previous month. The main reason was that the sharp decline in industrial chain prices caused scissor differences and eroded the profits of the steel industry. 3) Expenses remained flat during the period, and operating cash flow was under pressure. 1Q24's three fees per ton of steel were +2 yuan to 100 yuan month-on-month, of which sales/management/financial expenses for a ton of steel were +3/-7/+7 yuan month-on-month to 18/47/36 yuan. The operating cash flow of the 1Q24 company was -1.31 billion yuan, -1,46/-2.97 billion yuan year-on-month. This was mainly due to a year-on-year decline in net cash inflows from both sides of the purchasing and sales side of the economy at the bottom of the boom, as well as financial companies' statements.
Development trends
Location advantages help reduce losses, and I am optimistic that the company's profits will improve as the downstream economy recovers. 1) The company has a geographical advantage near the riverside. On the one hand, it responds quickly to the market, achieves efficient logistics operation and cost reduction, and weakens the scissor gap caused by the decline in the industrial chain; on the other hand, it continuously strengthens channel construction, leverages the locational advantage of key products, deeply exploits key markets, and expands overseas business. 1Q24 steel export volume was +62.7% year-on-year, and net profit reduced by 198 million yuan. 2) Recently, we have observed that the decline in steel watch demand has narrowed, and inventory removal has remained relatively rapid; at the same time, there are signs of recovery in the downstream manufacturing industry, and policies such as superimposed trillion treasury bonds and large-scale equipment upgrades are gradually being implemented, which is expected to further boost demand for steel in manufacturing and infrastructure. There is a marginal improvement in industry fundamentals. We are optimistic that the company's 2Q profit will rise steadily.
The transformation of special steel will gradually begin, saving new potential for medium- to long-term development. The company firmly promoted the “Putonte” strategy. In 2023, the first phase of the new special steel project and the new color coating line in Hefei were quickly completed and put into operation, achieving a 25% year-on-year increase in new product development, and 7 new products were launched domestically. Among them, the new special steel project targets the middle and high-end markets such as bearing/gear/spring steel, and will further help the company's product structure move towards diversification and high-end after the gradual release of production capacity. We believe that the transformation to special steel is an important change in the company's development strategy. It is expected to become an important profit growth point for the company in the medium to long term, and gradually reduce the company's profit periodicity.
Profit forecasting and valuation
Considering the marginal improvement in industry fundamentals, we have kept 24e/25e net profit unchanged. The current A/H stock prices for 24e and 25e P/B are 0.7x/0.6x and 0.7x/0.6x, respectively. Considering that the company's P/B is at its historical bottom and is expected to recover in 24 years, keep the current rating and target price of A/H shares unchanged. The corresponding 24e and 25e P/B are 0.9x/0.44x, implying 43%/57% upward space.
risks
The real estate economy declined more than expected; the global economy accelerated its decline.