Incident: In the first half of 2024, we achieved total operating income of 56.684 billion yuan, -1.19% year over year, and realized net profit of 0.395 billion yuan to mother, or -3.80% year on year. In 2024, Q2 achieved operating income of 27.145 billion yuan, -5.26% year-on-month, and Q2 achieved net profit of 0.419 billion yuan to mother, or -10.61% year-on-year, turning a loss into a profit month-on-month.

The product structure continues to be optimized, and 2024H1's strategic and key product output ratio reached 75%: the total output of strategic and key products in the first half of 2024 was 8.8112 million tons, accounting for 75% of the company's total steel output, an increase of 9 pcts over the previous year. The output of the three strategic products (electrical steel, automobile plate, tinned (chrome) plate) was 3.4542 million tons, up about 10% year on year, including electrical steel production of 0.9474 million tons, +11.70% year on year, 2.1682 million tons of automobile plate, +11.37% year on year, and 0.3386 million tons of tin (chrome) plate production, +2.70% year on year; nine key products (cold-rolled special steel, hot-rolled pickled steel, weather-resistant steel, steel for energy use, automotive structural steel, high-strength construction machinery steel, steel and pipes (Wire steel, bridge steel, ship plate offshore steel) production was 5.357 million tons, an increase of about 16% over the previous year.

2024H1's production of high-magnetic-oriented silicon steel was 0.1621 million tons, +19% over the same period: due to (1) the continuous commencement of construction of domestic UHV projects and the increase in demand in overseas markets, the demand for high-magnetic-oriented products has increased; (2) the recent rise in copper prices has also had an impact on transformer manufacturers in terms of material selection and design. Improved demand for high-magnetic-oriented silicon steel has driven up its price. Mysteel data shows that the average price of 2024Q2 high magnetic-oriented silicon steel was 1,5007 yuan/ton, up 1.55 from Q1 %. From July to August 15, 2024, the average price of high-magnetic-oriented silicon steel rose further to 15,491 yuan/ton, up 3.22% from Q2. The company's production of high-magnetic-oriented silicon steel in the first half of 2024 was 0.1621 million tons, +19% over the same period last year.

In July, the company and BMW Brilliance signed the “Memorandum of Cooperation to Build a Green and Low-Carbon Steel Supply Chain”: The company plans to provide low-carbon emission automotive steel plates by building a new EAF production line and optimizing the existing BF-BOF process.

Starting in 2025, the company will have the capacity to provide 50% scrap compared to automobile board products based on existing long-term processes, and the products will reduce carbon by more than 40% compared to 2020 levels. Starting in 2026, the company will begin supplying BMW Brilliance with automobile panels produced based on electric arc furnaces (EAF) in batches, which have higher carbon reduction capabilities. In 2030, the company will have an automobile board production capacity of 80% or more compared to scrap, and the capacity to reduce carbon by more than 70% compared to 2020; at the same time, the comprehensive scrap ratio for BMW Brilliance products will reach more than 60%, reducing carbon by more than 50% compared to the 2020 comprehensive level.

Profit forecast, valuation and rating: Due to weakening demand in the steel industry, we lowered the company's 2024-2025 net profit forecast of 20.83% and 24.03% to 1.233 and 1.339 billion yuan, respectively, and added the company's 2026 net profit forecast to 1.488 billion yuan. As the company's product structure continues to be upgraded, profitability is expected to rise further and maintain the company's “gain” rating.

Risk warning: Product structure upgrades fall short of expectations; downstream steel demand recovery falls short of expectations; industry crude steel production exceeds expectations.