1H24 results slightly miss our expectations

Baoshan Iron & Steel announced its 1H24 results: Revenue fell 4.1% YoY to Rmb163.25bn, and attributable net profit dropped 0.2% YoY to Rmb4,545mn, slightly missing our expectations due to decline in non-steel business earnings.

Steel sales volume remained stable; main business earnings rose

despite sector downturn. In 1H24, the firm's steel sales volume fell 0.2% YoY to 25.51mnt, and profitability improved thanks to product mix optimization, with blended gross profit per tonne rising 15.1% YoY to Rmb180/t.

Expenses dropped, and cost-control efforts paid off. In 1H24, financial

expense rose Rmb297mn YoY due to changes in FX rates of the US dollar. Thanks to cost-reduction measures, selling and G&A expenses declined 8% and 17% YoY, and overall expense per tonne steel fell 3.4% YoY to Rmb125/t. In total, costs dropped Rmb4.55bn, bolstering earnings growth.

Earnings diverged among subsidiaries; non-steel business earnings

edge down. In 1H24, earnings at subsidiaries diverged. Net profit rose 13% YoY to Rmb1.35bn for Baosight Software, fell 26% YoY to Rmb640mn for Baosteel International, and turned negative for Baowu Carbon. Meanwhile, investment income dipped 49.5% YoY to Rmb1.03bn due to loss of controlling stake in Baosteel Group Finance in 2023, leading to a decline in earnings from the non-steel business.

High dividends continued. The company has kept its dividend payout ratio at more than 50% for years. It plans to pay a dividend of Rmb0.11/sh for 1H24, implying a dividend ratio of 52%.

Trends to watch Sales of high-end products continued to ramp up, and globalization progressed; core assets boast strong competitive advantages.

High-end products became a core competitive advantage as their

sales ramped up. In 1H24, sales volume of the firm's "1+1+N" products rose 17% YoY to 15.09mnt, with new products accounting for 22%. The high-end thin steel sheet and oriented silicon steel projects will likely gradually come online in 2024-2025, and we expect earnings of steel products to improve as high-end capacity continues to ramp up.

The company has stepped up its globalization by shifting from exports to overseas capacity expansion, creating a potential new

growth driver. The firm received 3.04mnt of export orders in 1H24, a

record high for the same period. Moreover, the overseas factory that the firm is jointly building with Saudi Aramco may start production in 2026. We

think the construction of overseas production capacity may create a new growth driver.

Strong cash flows sustained; earnings and valuation to recover in

2H24. With earnings at a cyclical bottom in 1H24, the firm continued to strengthen its product competitiveness. In 2Q24, its net operating cash flow and free cash flow surged Rmb11.8bn and Rmb12.4bn QoQ to Rmb8.8bn and Rmb4.2bn, indicating the high quality of core assets. As the peak season arrives in September, we expect supply and demand conditions in the steel industry to improve further, and the firm will fully benefit as a leading steelmaker. We expect recovery in both earnings and valuation, and excess returns.

Financials and valuation

Due to the sharper-than-expected decline in the firm's non-steel business earnings, we lower our 2024 and 2025 net profit forecasts 23.7% and 13.8% to Rmb10.73bn and Rmb13.54bn. The stock is trading at 12.4x 2024e and 9.8x 2025e P/E. Given the firm's resilient earnings amid the down-cycle, we maintain an OUTPERFORM rating and our target price of Rmb9.05, implying 18.5x 2024e and 14.7x 2025e P/E, offering 49.6% upside.

Risks

Worse-than-expected real estate downturn; worsening of global economic downturn.