Performance review
2019 and 1Q20 results are in line with our expectations
The company announced 2019 and 1Q20 results: 2019 revenue of 121.498 billion yuan, year-on-year + 0.4%; return to the mother net profit of 2.559 billion yuan, year-on-year-29.4% X 1Q20 return net profit of 229 million yuan, year-on-year-37.9%, month-on-month-70.6% 1Q20 2019 is roughly in line with the previous forecast (1Q20 meets our expectations). Comments:
1) the resilience of steel price and profit is stronger than the industry average. The company's annual sales fell 2.1% year-on-year to 25.04 million tons, and the price per ton of steel was about 4030 yuan, which was basically the same as the same period last year, and the price toughness was significantly stronger than the industry average (we think it may benefit from the optimization of the company's product structure). The gross profit per ton of steel fell by 45 yuan to 509 yuan compared with the same period last year, and the correction was significantly narrower than the industry average. 2) the output of vanadium products increased greatly, but the gross profit margin fell sharply. The company's annual vanadium slag output increased by 49% to 185000 tons compared with the same period last year. However, as the price of the company's vanadium products fell by about 30%, and the gross profit margin of the company's vanadium products fell by 140 million yuan to 710 million yuan compared with the same period last year, the gross profit of the company's vanadium products fell by 140 million yuan to 710 million yuan. 3) the cash flow is robust. In 2019, the cash flow of the company's operating activities was-1.8% to 9.81 billion yuan compared with the same period last year; the operating cash flow of 1Q19 fell only 1.6% from the same period last year to 5.07 billion yuan, and the stability of cash flow exceeded our expectations, which we believe is mainly due to the controlled scale of the company's working capital and the increase in depreciation. 4) the year-end net debt ratio of the company increased by 10ppt to 91% compared with the same period last year, which is still at a high level.
Trend of development
Product upgrade will be carried out step by step. At the product end, in 2019, the company's galvanized automotive plates achieved batch supply to high-end joint ventures such as BMW and Mercedes-Benz, and the third generation automotive steel QP1180 was successfully offline; the field of home appliance panels is carbon steel panel products for high-end household appliances, customized research and development for high-end customers such as Haier, Hisense, Meiling, etc. On the channel side, the company plans to further enhance the number of high-end direct supply customers and strategic customers, and gradually speed up the construction of processing and distribution centers to enhance service capacity. We believe that the company's two-pronged product channel approach is expected to enhance the company's competitiveness or accelerate its transformation from a "steelmaker" to a "material solution service provider".
2Q20 may still be under pressure to make profits. We believe that the company's products are mainly plate, and the downstream is mainly manufacturing, which is more affected by the epidemic in the first half of this year than long wood. Considering that the current social inventory of plate is still high and there is no large-scale production reduction arrangement for long-process steel mills, we expect that it will take time for inventory to be eliminated. The company's 2Q20 earnings are expected to remain under pressure.
Profit forecast and valuation
Due to the reduction of steel gross margin assumption, we reduced 2020e EPS by 28% to 0.14 and introduced 2021e EPS 0.16 yuan. The company's current share price corresponds to 2020 0.4x/0.4xP/B 21e, maintaining a neutral rating. We cut the target price by 12.5% to 2.60 yuan, corresponding to 2020 0.5x/0.5x 21e Pmax B, which has 22% upside space.
Risk
Demand in peak season is lower than expected.