1H24 results fall short of our expectations

The company announced 1H24 results: revenue of 58.82 billion yuan, -8.6% YoY; net profit to mother 0.41 billion yuan, or -19.1% YoY. Industry demand recovered slowly in the first half of the year, and the company's performance fell short of our expectations.

1) Steel production increased slightly, and process cost reduction achieved results: the company achieved 12.78 million tons of steel output, +1.5% over the same period. The company attached great importance to material structure optimization, and furnace costs and comprehensive fuel consumption continued to decrease. We estimated the company's tonne steel cost -9.7% to 3,949 yuan in the context of a 100% production and sales rate.

Downstream demand in the 1H24 industry is weak. The price of a ton of steel was -9.8% to 4,350 yuan, and the gross profit per ton of steel was -48 yuan to 390 yuan due to the decline in steel prices. 2) Production of vanadium products reached a new high, and revenue was weak due to falling vanadium prices:

1H24 achieved 0.0929 million tons of vanadium slag output, +16.1% year over year; the decline in vanadium prices in the first half of the year caused the company's vanadium product revenue to be weak, and the vanadium product business revenue was -24.0% to 0.69 billion yuan year-on-year. 3) Interest expenses were reduced, and the cost rate was optimized month-on-month: the company strengthened cost control. 2Q24 interest expenses were -17% to 1.1 billion yuan month-on-month, and the fee rate for the period was -2.2ppt to 6.1% month-on-month, which was basically the same as the previous year. 4) The increase in construction projects has put pressure on free cash flow in the short term: 1H Hegang Steel's industrial upgrade and Xuangang's capacity transfer project/old district exit project each increased capital by 4.7/1.7 billion yuan, of which a total of 5 billion yuan was added in 2Q, resulting in a reduction of free cash flow to -3 billion yuan, and free cash flow was under pressure in the short term.

Development trends

High-end products+optimized production capacity layout, sufficient internal growth momentum. 1) The product structure continues to be upgraded: The company is accelerating the pace of transformation from “steel to materials, manufacturing to service”, continuing to increase the volume of high-profit automotive steel products, and increasing investment in R&D of high-end products such as new energy steel/steel for nuclear power. We believe it is expected to contribute additional volume to the company's profits. 2) The expansion of location advantages is expected to help the company reduce costs and increase efficiency in the steel business: The company continues to promote location layout adjustments. The company's Hangang Steel Phase II project was fully put into operation in June of this year, and the construction of the Legang Phase II 4.05 million tons/year integrated iron and steel rolling production base is progressing steadily. The new base has significant location advantages. We believe it is expected to help the company further reduce costs and increase efficiency.

Leading steel companies in Hebei are expected to benefit from differentiated production cuts and are optimistic about the company's 4Q profit recovery. The company's profit rebounded against the trend in 2Q24, and the net profit margin was +0.3pp/0.1ppt year-on-year, showing strong profit stability. Looking ahead to 4Q, we believe that the production limit policy may become stricter as the heating season arrives, and the company will fully benefit as the first benchmark steel company in the Beijing-Tianjin-Hebei region to promote ultra-low emission transformation, and 4Q profits are expected to recover.

Profit forecasting and valuation

Due to the decline in the company's gross profit per ton of steel, we lowered our 24/25e net profit of 35.4%/30.7% to 0.98/1.35 billion yuan. The current stock price corresponds to 24/25e 19.5x/14.2x P/E. Since the company still maintains profit resilience in the downturn cycle, we maintain the company's neutral rating. Considering the downward shift in the valuation center of the downside cycle, we lowered our target price by 21.7% to 2.13 yuan, corresponding to 24/25e 22.5x/16.3x P/E, implying 15.1% upward space.

risks

The decline in real estate surpassed expectations; the global economy accelerated its decline.