Introduction to this report:

The company's debt pressure is gradually easing, and financial expenses are expected to continue to fall, which is conducive to a gradual recovery in its profit level per ton of steel.

The company has gradually developed a differentiated competitive advantage in terms of ultra-low emissions and low carbon; in the medium to long term, we believe that the company, as a leader, will benefit from stricter environmental protection policies.

Key points of investment:

Maintain an “Overweight” rating. We expect the company's performance to pick up month-on-month in the second quarter of 2024 as cost-side pressure gradually improves. Looking at the full year of 2024, considering that industry demand is still weak and the company's operations continue to be under pressure, we lowered the company's net profit forecast for 2024-2025 to 0.842/1.036 billion yuan, and added the 2026 net profit forecast of 1.204 billion yuan, which corresponds to EPS of 0.11/0.13/0.15 yuan. Referring to comparable companies, the company was valued at 0.50 times PB in 2024. We lowered our target price to 3.21 yuan (originally 4.95 yuan) to maintain the “gain” rating.

The balance ratio has continued to decline in recent years, and the pressure on financial expenses has gradually eased. As of 2024Q1, the company's balance ratio fell to 60.44%, a cumulative decrease of 13.16 percentage points from the 2016 high of 73.60%; the company's financial expenses in 2023 were 1.353 billion yuan, down 0.945 billion yuan from the 2018 high of 2.298 billion yuan, a decrease of 41.12%. In recent years, the company's debt pressure caused by its relocation of steel and the early relocation of Jingtang Company has been gradually easing. Its financial expenses and depreciation of tons of steel are expected to continue to decline, which is conducive to a gradual recovery in the company's profit level per ton of steel.

High-magnetic-sensitive electrical steels have competitive advantages. The “Energy Efficiency Limits and Energy Efficiency Classes for Power Transformers” (GB 20052-2024), which was recently released on April 29, 2024, will be implemented on February 1, 2025. It places higher requirements on the energy efficiency levels of power transformers, which is conducive to the growth of demand for highly magnetically sensitive electrical steel. However, the company's ultra-thin high-magnetic-oriented electrical steel of 0.20mm and below maintains the highest domestic sales volume, and we expect the company to benefit from the implementation of the new standards.

Leading the industry in energy saving and carbon reduction layout will benefit from stricter environmental requirements. On May 23, 2024, the State Council issued the “2024-2025 Energy Conservation and Carbon Reduction Action Plan”, which proposes “by the end of 2025, the steel industry will account for 30% of production capacity above the energy efficiency benchmark level, complete technological transformation or elimination, and complete ultra-low emission transformation of more than 80% of the country's steel production capacity.” We expect steel companies that do not meet energy consumption standards to face pressure to clear up in the future.

Meanwhile, Qiangang Steel Company is the first long-process steel company in the world to achieve ultra-low emissions, and both Qiangang Company and Jingtang Company were awarded the first batch of “Double Carbon Best Practice Energy Efficiency Benchmarking Plant Cultivating Enterprises” by the China Steel Association. The company has gradually formed a differentiated competitive advantage in terms of ultra-low emissions and low carbon. In the medium to long term, we believe that the company, as a leader, will benefit from stricter environmental policies.

Risk warning: Demand continues to drop sharply, and raw material prices have risen sharply.