1H24 results fall short of our expectations

The company announced 1H24 results: revenue of 75.95 billion yuan, -4.5% year-on-year; net profit to mother of 1.33 billion yuan, or -48.2% year-on-year. The recovery in industry demand in the first half of the year was weak, and the company's profit fell short of our expectations.

1) The share of grade steel continued to rise, and export sales reached a new high: 1H Company's steel sales volume was -6% to 12.7 million tons, of which grade steel accounted for +1.2ppt to 64.6%. 2Q export sales volume was +38% year-on-year to 0.53 million tons, all of which are high value-added varieties. 2) The recovery in demand led to an improvement in marginal profit: 1H Steel faced a two-way situation where demand was weak and raw material prices were strong, leading to pressure on the company's profits. Price/gross profit per ton of steel was -3.4%/-32.3% YoY to 4407/355 yuan. The recovery in downstream demand in 2Q led to marginal profit improvement, and gross margin was +2.3 pp/ -3.1 ppt to 8.5% year-on-year. 3) The overall cost rate was stable during the period: the company strengthened cost reduction management. 2Q sales/management expenses were -6%/-7% compared to the same period, and the cost of 1H ton of steel remained flat year-on-year at 4,052 yuan. 4) Significant increase in investment income and other income: 1H investment income/other income was +0.07/1.05 billion yuan year-on-year due to increased interest on large deposits and value-added tax deductions for subsidiaries.

Development trends

The momentum for endogenous growth is sufficient, and the company's product advantages are expected to continue to expand. The company continues to expand high-precision special steel varieties to create strong product competitive advantages: 1) Silicon steel: 1H develops 30 new grades, with sales volume +46% to 0.99 million tons. Construction of the second phase of the silicon steel project is being accelerated and will be put into operation in early 25; 2) Automobile board: production line and patent product certification of the Phase II project are progressing in an orderly manner, striving to achieve production in 24 years; 3) Industrial wire rods: the share of special steel sales will increase steadily, and we expect an increase of 5-10ppt to 25-30% in 25. We believe that the high-end product structure of the company is progressing steadily, and that endogenous generation can be expected for a long time.

The attributes of high-quality cash flow are obvious, and I am optimistic that the company's mid-term valuation center will move upward. The company showed steady profitability and operating profitability in the bottom steel cycle. In 2Q24, the company's net operating cash flow/free cash flow was +5.1/4.9 billion yuan to 5.3/4.1 billion yuan year-on-year. Verify the company's excellent hematopoietic ability. Furthermore, the company's dividend is showing a gradual upward trend, and has been steadily increasing to more than 30% in 23 years. We believe that as the company's asset expenditure cycle peeps back and downstream demand gradually recovers, the company's high-quality cash flow attributes will continue to be verified and further recognized by the market. We are optimistic that the company's mid-term valuation center will move upward.

Profit forecasting and valuation

Since 1H's gross profit per ton of steel fell more than expected, we lowered our gross profit assumption and lowered the 24/25e net profit to mother by 44.5%/38.7% to 3.15/4.29 billion yuan. The current stock price corresponds to 24/25e 8.7x/6.4xp/e. We believe that the company has high-quality cash flow attributes and maintains an industry rating. Considering that the valuation of the downturn cycle sector is low, we lowered the target price by 34.1% to 5.01 yuan, corresponding to 24/25e11.0x/8.1x P/E, implying 25.9% upward space.

risks

The real estate economy declined more than expected; the global economy accelerated its decline.