Incidents:
The company released its 2024 quarterly report: In Q1 2024, the company achieved operating income of 36.912 billion yuan, -7.17%/-16.21% month-on-month; realized net profit of 392 million yuan, or -43.14% /month-on-month -59.78%; realized net profit without return to mother of 323 million yuan, or -49.92% YoY/-52.8% month-on-month.
Industry profits were under pressure in the first quarter, dragging down the company's performance
1) Price: In the first quarter of 2024, due to factors such as slow downstream construction starts and consumption falling short of expectations, steel prices continued to be under pressure. The average price in the Q1 sheet/long material/steel pipe market was 4,565/4,100/4,817 yuan/ton, -5.14%/-7.87%/-6.5% YoY, +0.57%/-0.25%/+0.84% month-on-month. 2) Profit: Upstream raw material prices remained strong in the first quarter, squeezing the profit margins of steel companies and being dragged down by the cost side. Q1's gross sales margin was 5.86%, down 1.56 percentage points year on year and 2.3 percentage points month on month.
Sales, research and production continue to grow at the same time, and the industry maintains a competitive advantage
1) The product structure continues to move towards the middle and high-end. In 2023, the company sold 16.83 million tons of grade steel, accounting for 63% of annual sales, an increase of 3 percentage points over last year. 2) The technical advantages of the product continue to be consolidated. In '23, the company invested 6.83 billion yuan in R&D, an increase of 6% over the previous year, accounting for 4.2% of total revenue; 659 new patents were granted throughout the year, including 120 invention patents; and developed more than 180 new varieties such as extra-thick rack steel throughout the year, adding 30 new steel types to “replace imports”. 3) Production line structure upgrade and adjustment to provide hardware support. The full thermal load test run of the Valin Xianggang High Speed Wire Reconstruction Project, and technical improvement projects such as the second phase of the bar refining line are progressing in an orderly manner, and is expected to be fully put into operation in 2024; Valin Lianggang achieved a production capacity of 200,000 tons of unoriented silicon steel products and 90,000 tons of oriented silicon steel semi-finished products; the first step of the Valin Henggang production line upgrade project was successfully completed; the second phase of the VAMA automobile board project was put into operation, adding 450,000 tons of high-end automotive steel production capacity per year.
The steel industry is gaining momentum, and the company's performance can be expected to improve
Looking at the whole year, we believe that steel demand is still stable. With policy support, demand that was suppressed earlier is expected to be gradually released. At the same time, the rebound in global steel demand will benefit China's steel export situation. After entering the second quarter, the supply and demand relationship in the steel industry improved markedly, and with the continuous release of favorable policies, downstream project commencement continued to advance, consumption expectations were further stabilized, raw material prices bottomed out and began to support the rise in steel prices, enthusiasm for black upstream and downstream production began to pick up, and positive feedback from the industry began to gain momentum and effect.
Profit forecasting and investment advice
The company continues to consolidate its leading edge in some segments, maintains relatively stable profits at the bottom of industry profits, and has a strong ability to withstand risks. The assessment of state-owned listed companies is being optimized and improved, and expectations for increased company dividends have been fulfilled. We believe there is room for further restoration of the company's valuation level. Due to current downstream demand falling short of expectations and raw material costs remaining strong, the company's net profit forecast for 24-26 was lowered to $53.08/55.74/6.028 billion yuan, respectively. The previous value was $57.67/65.57/6.959 billion yuan, and the corresponding EPS was 0.77/0.81/0.87 yuan/share. Since the company's valuation is being repaired, 8 times PE in 2024 was selected as the basis for the company's valuation, corresponding to the target price of 6.16 yuan in 2024, maintaining the company's “buy” rating.
Risk warning
(1) Steel prices fell short of expectations; (2) the company's product structure upgrade fell short of expectations; (3) raw material prices and costs rose beyond expectations.