3Q24 results fell short of our expectations

The company announced 3Q24 results: 3Q revenue -6.5% YoY to 79.61 billion yuan, and net profit to mother -64.8% YoY to 1.34 billion yuan. Due to the sharp drop in 3Q steel prices, the company's profit was lower than our expectations.

1) Steel sales are stable, and the product structure continues to upgrade: 3Q steel sales volume was -3% to 12.99 million tons, which remained flat month-on-month, and “1+1+N” products sold 7.46 million tons, accounting for +6ppt to 57% year-on-year.

2) The decline in steel prices has put pressure on the profit of the steel business: black prices have declined rapidly in 3Q, and the difference in steel purchase and sales prices have shrunk significantly. The company's tonne steel price is -8% to 4,587 yuan month-on-month (-6%/-2% month-on-month to 4277/6995 yuan), and the gross profit per ton of steel -36% month-on-month to 242 yuan.

3) Production cost control is stable, and the three fees for a ton of steel have risen slightly: the company strengthened cost reduction, and the cost per ton of steel was -6% month-on-month to 4,497 yuan. Due to the reduction in interest income, the three fees per ton of steel were +8% month-on-month to 132 yuan.

4) Operating profitability continues to improve, highlighting the high quality cash flow attributes: 3Q company operating cash flow/ +13/ 41% year over year to 9.9 billion yuan, free cash flow/ +36/ 135% year over year to 5.7 billion yuan. 5) Significant increase in other revenue: 3Q's other revenue was 1.02 billion yuan (0.12 billion yuan in the same period last year).

Development trends

The bottom of the industry is working hard on its internal skills and is optimistic that the mid-term profit center of the industry's core assets will move upward. 1) Adhering to the optimization and upgrading of the product structure, the continued release of high-end products is expected to contribute to increased profits: the company continues to promote product differentiation strategies and enhance brand value. 1-3Q's “1+1+N” product sales increased 11% year over year to 22.55 million tons, of which sales of oriented silicon steel increased 27.5% year on year. In September, the new production lines for ultra-high strength steel and aluminum-silicon coatings at the Zhanjiang base were officially put into operation, and a major breakthrough was made in the trial production of ultra-high carbon tool steel at the Meishan base. We are optimistic that the release of high-end products will contribute to the company's additional profit. 2) Cost control continues to be strengthened, which is expected to enhance the company's cost competitiveness: the company has increased its cost control of economic materials, logistics and transportation. 3Q achieved a total cost reduction of 2.88 billion yuan, exceeding the annual target. We believe that as the company continues to further reduce costs, the profitability of its product tons will further increase.

There is no need to be too pessimistic at the bottom of the cycle; we are optimistic that 4Q's profit valuation will double recover. The 3Q industry is facing an unfavorable situation of weak demand and accelerated active warehousing. The price of black products has dropped sharply, the difference between plate purchase and sale has shrunk sharply, and the sector is at the bottom of profits and expectations. Since 4Q, market confidence has continued to improve. Spot prices for various types of steel futures have risen sharply, and profits of steel companies have recovered significantly. We believe that with the implementation of “steady growth” incremental policies one after another, expectations are expected to continue to improve, driving steel prices back up, and the company is expected to usher in a double recovery in profit valuation.

Profit forecasting and valuation

As 3Q steel prices fell more than expected, we lowered 24/25e net profit -16.4%/-14.9% to 8.97/11.53 billion yuan. The current stock price corresponds to 24/25e 17x/13x P/E. Considering that the company showed strong operational resilience at the bottom of the cycle as a high-quality cash flow asset, we maintained our outperforming industry rating and target price of 9.05 yuan unchanged, corresponding to 24/25e 22x/17x P/E, implying 34% upward space.

risks

The real estate boom is declining; the global economy is declining at an accelerated pace.