Steel production and sales increased overall, and export orders increased significantly. In 2023, the company achieved steel production of 51.94 million tons, an increase of 4.2%; sales volume of 51.9 million tons, an increase of 4.3%, of which sales volume of cold-rolled sheets was 20.51 million tons, an increase of 4.9%.

The company strengthened its product differentiation capabilities. In 2023, sales of “1+1+N” products were 27.92 million tons, an increase of 10.0%. High-grade unoriented silicon steel production lines for new energy vehicles were put into operation, and cold-rolled automobile plates and oriented silicon steel maintained a high market share. In addition, the company seized export opportunities. The annual export sales volume was 5.837 million tons, an increase of 46.7%, and the export volume of automobile panels reached a record high. 2024Q1's steel production and sales volume were 12.66 million tons and 12.52 million tons respectively, up 3.1% and 3.4% from the same period. The high value-added product group continued to expand, and sales of “1+1+N” products reached 7.312 million tons, an increase of 16.5%. The company actively used both domestic and international markets, and 2024Q1 achieved export orders of 1.52 million tons, exceeding the target schedule and remaining basically the same as the previous year.

Revenue declined year over year, and demand was undermining gross profit margins. In 2023, the company achieved total revenue of 344.9 billion yuan, a year-on-year decrease of 6.55%, mainly due to falling demand in the steel market and falling prices. Among them, cold-rolled sheets amounted to 117.6 billion yuan, a decrease of 3.49%; hot-rolled sheets amounted to 85.38 billion yuan, a decrease of 8.05%. In 2023, the average price of the company's steel was 4,841 yuan/ton, down 9.08%. During the reporting period, the company's gross margin was 6.2%, an increase of 0.36pct over the same period. Among them, the gross profit margin of cold-rolled plate was 7.6%, an increase of 2.5 pct; the gross margin of hot-rolled plate was 1.5%, a decrease of 0.8 pct. Since 2024, the company has overcome adverse effects such as the decline in the steel market and the narrowing price spread. Q1 achieved operating income of 80.81 billion yuan, an increase of 2.44%; gross margin was 5.13%, a decrease of 0.14pct.

Expense rates increased during the period, and net profit declined slightly. The cost rate for 2023 was 3.04%, up 0.09pct.

Among them, the sales expense ratio was 0.52%, the same increase was 0.04 pct; the management expense ratio was 1.24%, the same increase was 0.06 pct; the financial expense ratio was 0.29%, down 0.13 pct, mainly due to increased interest income and reduced expenses, and the increase in exchange income; and the R&D expense ratio was 0.99%, up 0.13 pct, mainly due to increased R&D investment. In 2023, the company calculated a total of 165 million yuan for various impairment losses, compared to 1,084 million yuan for the same period in '22. Overall, the company's net profit to mother in 2023 was 11.944 billion yuan, down 1.99% from the same period. In 2024Q1, the company's net profit to mother was 1,926 billion yuan, an increase of 4.04% over the same period.

Operating cash flow has deteriorated, and the balance ratio has declined. The company's revenue ratio in 2023 was 1.13, up 0.16 pct, mainly due to a decrease in operating income; the payout ratio was 1.03, or 0.02 pct. Excluding the influence of finance companies, net cash flow from operating activities was 30.38 billion yuan, a year-on-year decrease of 7.11 billion yuan; net cash flow from investment activities was 28.52 billion yuan, an increase of 10.2 billion yuan over the previous year. In 2023, the company's balance ratio was 41.46%, down 4.33pct from the previous year, mainly because the finance company was no longer included in the scope of the merger. The company insists on high dividends. 23H2 plans to distribute a cash dividend of 0.20 yuan/share (tax included), accounting for 58.72% of 23H2's net profit to mother.

Investment advice: Facing declining steel demand, the company optimizes its product structure and has high performance resilience. Currently, the steel industry may have bottomed out, and future performance is expected to improve. The company's net profit for 2024-2026 is estimated to be 126.34, 132.19, and 13.682 billion yuan, corresponding PB of 0.7, 0.7, and 0.7 times, maintaining the “Highly Recommended” rating.

Risk warning: risk of exchange rate fluctuations, risk of downstream demand falling short of expectations, risk of raw material price fluctuations.