Event: the company announced that it intends to use 2.15 billion yuan in free cash to acquire the 100% stake in Luoyuan Minguang held by the company's controlling shareholder, Sangang Group. This transaction constitutes a related party transaction, but does not constitute a major asset restructuring of the listed company.
Group iron and steel production capacity integration final landing: Luoyuan Minguang mainly produces construction steel, with an annual output of about 1.9 million tons, its main process equipment are: 1 500m3 blast furnace, 1 660m3 blast furnace, 2 50-ton converters, 1 high-speed wire rod production line and 1 high-speed bar production line. The product structure is close to that of the company headquarters and has a high degree of cooperation. at the same time, Luoyuan Minguang is similar to San'an Iron and Steel acquired by the company before, both located along the coast and in a superior geographical position, considering that the raw materials of steel mills in Fujian Province are highly dependent on external mining, convenient transportation conditions are conducive to reducing the cost of raw materials and product sales. Its net profit in 2017-2019 was 9. 5% respectively.
200 million yuan, 1.07 billion yuan and 650 million yuan, according to the 2019 operating results, the valuation of the underlying assets is 3.3 X. The action of capacity integration is in line with market expectations, which will help the company and Sanshan Iron and Steel Group to avoid inter-industry competition, reduce related party transactions, enhance the company's existing main business of construction steel, and improve market competitiveness. The next step is to focus on the landing of the purchased capacity indicators: the iron and steel production capacity indicators obtained by the company through auction (iron: 1 million tons, steel: 1 million tons), the previous order signed an agreement with Fujian Yixin Iron and Steel to use their respective steel capacity indicators for strategic cooperation, but the cooperation has been suspended after negotiation. After the integration of Luoyuan Minguang, it will be conducive to the smooth implementation of the company's capacity replacement program, and further promote the company's industrial transformation and upgrading and the realization of coastal strategy. Superimposed with the newly purchased capacity target, the company's total crude steel production capacity will increase to nearly 13 million tons, and its market share in Fujian will reach more than 70%.
The fundamentals of the industry still face uncertainty: the impact of this epidemic on the company's production link is limited, and it is basically in a state of continuous production, but the progress of resumption of work in downstream industrial enterprises has been greatly affected. The delayed resumption of work resulted in a relatively low profit performance of the industry for a period of time after the year. The company's net profit of returning to its mother in the first quarter was 504 million yuan, a sharp drop of 48% compared with the same period last year. In the second quarter, with the epidemic under effective control, the demand for urgent work downstream is strong. According to estimates, taking into account the factors of inventory cycle, the average gross profit per ton of rebar at the industry level from April to May is 408 yuan, which is nearly 90 yuan higher than that in the first quarter. However, in the medium and long term, there is a greater downside risk in the real estate cycle which has accumulated greater mean regression pressure, and the capital construction maintains a moderate upward trend under the support of active fiscal policy, and there is a certain uncertainty in steel demand after hedging between the two. This is also the core reason for suppressing the valuation of steel stocks at present.
Investment suggestion: through the acquisition of Luoyuan Minguang, the company will further expand its production capacity, enhance its logistics cost advantage and enhance the company's overall competitiveness. The demand level of the industry is still facing great uncertainty, and there are phased game opportunities in the iron and steel sector. It is estimated that the company's EPS from 2020 to 2022 will be 1.05,1.09 and 1.18 yuan, respectively, and the corresponding PE will be 6.7x, 6.5x and 6.0x respectively, maintaining a "hold" rating.
Risk tips: repeated risks of the epidemic, uncertainty in the landing of production capacity indicators, and macroeconomic decline.