Southern China Ute Steel Long Material Base: As the largest long timber manufacturer in Guangdong Province, Shaogang Songshan has a comprehensive production capacity of 6.5 million tons of iron, 8 million tons of crude steel, and 8.2 million tons of steel per year. The products cover the three major series of plates, wires and bars, with bars and wires accounting for 69%. Downstream demand is mainly concentrated on key infrastructure projects and real estate construction industries in the province. The company is a high-end rod and wire manufacturing base under Baowu, China, and is determined to build the most competitive premium quality base of UTESTEEL in South China.

Bars contribute mainly to profits: the company's revenue consists of two parts. One is revenue from steel products, including rebar, wire, wide and thick plates, and special steel; the other is coking products and other revenue. Revenue in 2020 was 31,556 billion yuan, of which rebar, wire, wide and thick plates, and special steel accounted for 47.0%/17.3%/14.8% /9 of total revenue respectively.

7%, total steel revenue accounted for 88.8%, coking products accounted for 11.2%, and 95.8% of revenue came from Guangdong Province. Furthermore, looking at gross profit split, in 2020, rebar margins contributed 60.9%/18.7%/16.8%/1.8%/1.7% of total gross profit. Bars were the company's main profit item. In 2016-2017, when Changqiang's interpretation of weak boards was extreme, the gross profit contribution of bars was as high as 70%-80%.

Supply tightening hedges the slowdown in demand: On the supply side, in the context of carbon neutrality and the Ministry of Industry and Information Technology's demand to reduce crude steel production, the market anticipated that a nationwide production limit policy would be introduced in the early stages, but since the National Standing Committee recently named commodities twice in eight days and required “stable supply and prices”, prices returned to a reasonable range, and the supply-side production limit policy slowed down in stages. On the demand side, steel demand is still expected to support the steel demand boom before the downward inflection point of real estate appears in 2021. Combined with the recovery in manufacturing investment and the impetus of external demand on the industry, steel demand is still expected to continue to rise in the first half of 2021, but we need to pay attention to the risk of a return to the real estate average after policy tightening in the later stages. Demand for the short-term peak season can still be maintained. After subsequent demand slows down, if emission reduction and production limits are strictly enforced, supply is compressed or the impact of off-season demand is partially hedged; if emission reduction and production limits are marginally relaxed, steel prices may be weak, and subsequent supply and demand games will become more obvious.

Operating advantages: (1) Regional advantage: There are more than 30 steel companies in Guangdong Province, with a steel output of 42.08 million tons in 2020, CR3 about 46%, and the remaining production capacity is scattered. The company's production capacity ranked second in the province, competing with Yangchun New Steel, which ranked third, but judging from the production of building materials, Shaogang is still the leader in the province. Furthermore, the company is close to the Guangdong-Hong Kong-Macao Greater Bay Area and close to the steel consumer market. The average price of rebar is 220 yuan/ton higher than the national average, and the maximum price difference is as high as 797 yuan/ton. (2) Intelligent manufacturing: Shaogang's intelligent management and control platform is the world's first integrated intelligent control platform for steel. It performs intelligent control and production decisions on the entire iron area and energy medium system. After putting it into use, it can achieve efficient production collaboration and low-cost steelmaking. Iron water costs are reduced by 10-50 yuan/ton of iron, the blast furnace fuel ratio is reduced by 5-20 kg/t, and operator efficiency is increased by 30%-40%. The annual steel production per capita in 2020 increased 130.2% from 2015 to 1,324 tons, and the iron and steel ratio declined continuously from a high of 113.8% in 2016 to the latest 81.3%. (3) Base management and brand operation: By signing a framework agreement, other steel mills of the same type in the province are integrated as the company's production base, and the company is benchmarked in terms of technology and quality through management and output. For Shaogang, synergies between different bases can be exploited, and the company's market share and influence will be further increased. At present, four bases have cooperated, and it is estimated that the cooperative base will sell about 2 million tons in 2021.

Investment advice: Shaogang steel products cover the three major series of plates, wires and bars, accounting for 69% of bars and wires. It is a high-end bar and wire manufacturing base under Baowu in China. The company is connected to the Guangdong-Hong Kong-Macao Greater Bay Area, close to the steel consumer market, and enjoys a premium of 200+ yuan all year round. Even if later industry demand faces an inflection point, the company can use its leading advantage to undertake key infrastructure project guarantee requirements in the province during the Greater Bay Area construction period. Furthermore, by putting into use the world's first integrated steel intelligent management and control platform, the company's production efficiency has been greatly improved. Later, it will further enhance its market influence through the “base management and brand operation” model. At the industry level, since the period when production restrictions are expected to be the strictest this year may have passed, the sector in the latter half of the year may be dominated by phased opportunities for a rebound. Since the overall performance of the industry in the second quarter reached a new level, the next time to focus on individual stocks in the steel sector may be on the eve of the interim report. We expect the company to achieve net profit of 2,465 million yuan, 2,162 million yuan and 2,802 billion yuan respectively from 2021 to 2023, compared with +32.44%, -12.30% and +29.62%; corresponding EPS was 1.02 yuan, 0.89 yuan and 1.16 yuan, and the corresponding PE was 5X/6X/5X respectively, covering the “increase in holdings” rating for the first time.

Risk warning: Prices of raw materials fluctuate greatly; demand is under pressure due to sharp macroeconomic declines; supply-side pressure continues to increase due to inadequate implementation of emission reduction and production limits; there is a risk that information will be delayed or not updated in a timely manner.