Taking into account the expectation of the injection of the group's mining assets, we price Tai Gang Stainless at 14-16 times PE for 2012, corresponding to a target price of 7.21 yuan - 8.24 yuan for the next 12 months. This represents an increase of 36.52%-56.02% compared to the closing price on July 5, 2011. We initiate a "Buy" rating for the first time. During this period, expenses increased by 54.97 million yuan compared to the previous year. Among them, sales expenses increased by 41.11 million yuan, up 10.29%, mainly due to the increase in domestic freight and port fees for export products caused by the increase in product exports. Administrative expenses amounted to 505.66 million yuan, increasing by 28.68 million yuan compared to the same period last year. This was mainly due to the increase in performance-based compensation for management personnel and various insurance expenses in 2010. Financial expenses amounted to 709.04 million yuan. The company repaid part of its long-term and short-term loans during the reporting period, resulting in a reduction in bank loan interest expenses, and financial expenses decreased by 14.82 million yuan compared to the same period last year.
Comment: The company plans to develop an 11 million square meter steel structure residential demonstration project in Baotou. Phase one of the Wan Jun Dac Cheng project has already started construction and is expected to be pre-sold in July this year, with delivery scheduled before the end of next year. If sales are good, it will significantly boost the company's performance next year. On June 14, 2011, the company announced that its third-level subsidiary, Wan Jun Real Estate (Baotou) Co., Ltd., had acquired land reserves of 18.53 million square meters in Baotou, signaling the entry into the substantive stage of development for phase two of the Wan Jun Dac Cheng project. We continue to be optimistic about the market prospects for steel structure residences and maintain a "Buy" rating.
Risk warning: Investment growth in Xinjiang may be slower than expected. Baosteel's product prices are greatly influenced by the automotive, home appliance, and machinery industries, especially the automotive industry which has the biggest impact on Baosteel's pricing policy. Based on the current situation, automobile production and sales volumes will continue to rise after July, especially the recovery of Japanese automakers' production as the impact of the Japan earthquake gradually dissipates. In August, the production of the machinery industry will also hit bottom month-on-month. Therefore, Baosteel's product price policy in August conforms to the changing trend of future downstream demand, and we believe that Baosteel's product prices will be in a rising trend after August.
Net profit margin decreased year-on-year in the first half of the year but rebounded in the second quarter. According to calculations, the net profit margin for the first half of 2011 was 2.98%, lower than the 3.84% from the same period last year, indicating a weakening in overall profitability due to rapid cost increases since the beginning of the year. However, the net profit margin rebounded to 3.04% in the second quarter, significantly improving from 2.92% in the first quarter, showing benefits enjoyed during the peak season.
Key viewpoint: Net profit for the first half of the year increased by 18.6% year-on-year, basically in line with our expectations. The announcement showed that the company's net profit for the first half of the year was 389 million yuan, achieving an EPS of 0.51 yuan, growing by 18.6% year-on-year, basically in line with our expectations. Among them, the EPS for the second quarter was 0.287 yuan, increasing by 30.24% quarter-on-quarter and 23.63% year-on-year, indicating that the company's operating performance maintained steady growth under the backdrop of accelerated investment in Xinjiang, with less impact from the overall industry environment. The rise in steel prices was the main factor driving the company's performance growth, with the company achieving revenue of 14.024 billion yuan in the first half of the year, growing by 23.15% year-on-year.
Risk: The tonnage market value of Hebei Iron & Steel for 2011 corresponding to this target price (calculated by capacity) is 1,371-1,504 yuan, and the PB ratio is 1.20-1.32 times.
Risk warning: Poor new product orders, profit progress below expectations; cast pipe prices fail to rise in tandem with costs.
Research institution: Guodu Securities Analyst: Xiao Shijun Writing date: May 20, 2011
Future performance increments are substantial. The company currently has many projects awaiting commissioning or already commissioned but yet to achieve effectiveness, laying the foundation for stable future growth.
Valuation and investment advice
Research institution: Xiangcai Securities Analyst: Liu Jinbo Writing date: March 28, 2011
Profit forecast
Research institution: Guojin Securities (600109) Analyst: Wang Zhaohua Writing date: July 6, 2011
Giving an "Overweight" investment rating. High growth in performance in the first half of 2011 meets expectations and has three major highlights: resource reserve, regional advantage, and reorganization injection theme. It is estimated that the company's EPS for 2011-2013 will be 0.57 yuan, 0.63 yuan, and 0.69 yuan respectively, corresponding to PE ratios of 20, 18.2, and 16.5 times respectively.
Xining Special Steel (600117): Steady and positive development of three main businesses
Hang Xiao Steel Structure (600477): Approval by shareholders' meeting for the acquisition of land by a third-level subsidiary
It is estimated that the company will achieve fully diluted EPS of 0.278 yuan, 0.516 yuan, and 0.575 yuan in 2011-2013 respectively, growing by 15.38%, 85.78%, and 11.36% year-on-year respectively, corresponding to tonnage net profits of 158 yuan, 294 yuan, and 327 yuan respectively.
Profit forecast. Revenue is expected to reach 49.683 billion yuan and 54.269 billion yuan in 2011-2012, growing by 10.65% and 9.23% year-on-year respectively; post-tax net profit margins are expected to reach 3.45% and 4.05%, higher than the industry average. Net profit attributable to the parent company is expected to be 1.714 billion yuan and 2.197 billion yuan, achieving EPS attributable to the parent company of 0.21 yuan and 0.27 yuan in 2011-2012 respectively. Considering that the company's future investment theme aligns with mainstream market hotspots, we maintain a "Buy" rating.
Sohu Securities Statement: The information content in this channel is quoted from cooperative media and institutions, does not represent the views and positions of Sohu Securities, investors should prudently judge this information, and enter the market at their own risk.
Future investment theme: After acquiring Balun Mining, the company owns rare earth resources with mining value, which will enhance its valuation level in the market. Meanwhile, Baotou Iron & Steel and Bayi Iron & Steel have many similarities, and Baosteel always considers Baotou Iron & Steel as an important target for reorganization. Reorganization will be one of the main highlights of the company in the future.
Profit forecast
Emerging Cast Pipe (000778): First-half performance growth of 14.5%, in line with expectations
(1) Mine commissioning process, injection plan, and associated sale price difference worse than expected; (2) Steel and stainless steel industry recovery status not reaching expectations; (3) Macroeconomic fluctuations and trade friction risks.
Editorial note:
Linggang Steel (600231): Strong profitability of main products, obvious resource advantages
Steel Industry
Mineral asset injections are expected to increase the company's EPS in 2012 by 11%-35%. Assuming that Hebei Iron & Steel (000709) injects already commissioned iron ore capacity according to comparable companies' plans by the end of this year, the increase in EPS for the company in 2012 would be: (1) if Hanbao injection is not considered, 35.39%; (2) if Hanbao injection is comprehensively considered, 10.53%. Since mineral asset valuations are higher than steel assets, the increase in Hebei Iron & Steel stock price would be: (1) if Hanbao injection is not considered, 43.30%; (3) if Hanbao injection is comprehensively considered, 12.88%.
Steady and adaptable. Due to strong profitability in previous years, plate capacity expanded rapidly leading to market oversupply. Currently, the supply-demand environment for long products is better than plates. In the context of an overall weak industry environment, the company adapts to the situation, focuses on developing advantageous products. The company will prioritize the production of bars and wires while temporarily slowing down the production of plates and pipes due to market reasons. Flexible operations allow the company to adjust product structures timely based on market conditions, effectively ensuring overall profitability.
In terms of downstream product extension, the 36,000-ton radial forging product project has been commissioned, and the automotive and engineering machinery forging project and the centrifugal casting composite pipe project will soon be commissioned; the company's special tube project is being jointly constructed, and after commissioning, it can produce ultra-supercritical tubes, precision aviation tubes, and nuclear power tubes and other high-end tubes, which are expected to make significant contributions to the company's performance; additionally, the large-scale casting and forging parts project in Wuhu Sanshan planned for huge investment is the biggest highlight in the future.
Resource advantages are an important guarantee for the company to maintain a gross profit margin of around 20%. Since the beginning of 2011, the prices of major raw materials such as iron ore and coke have risen sharply, triggering a certain promoting effect on the significant growth in performance of Xining Special Steel, a company with prominent resource advantages; iron ore, coking coal, and special steel all made significant contributions to profitability, accounting for about one-third each. Additionally, the company holds a 35% stake in Mulie Coal Mine. Assuming that the underground mining project reaches full production of 12 million tons next year and the net profit per ton of coal is 400 yuan, this will add approximately 0.23 yuan per share to the company's earnings.
Given the uncertainty in the industry's recovery in the second half of the year, we do not adjust the company's profit forecast for now. It is estimated that the EPS for 2011 and 2012 will be 0.29 yuan and 0.43 yuan respectively, maintaining a "Recommend" rating.
Although currently in the traditional off-season for steel demand, steel prices have gradually shown signs of resilience recently. Yesterday, the steel market continued to rise following last week's favorable trend, with overall inventory continuing to decline. The main reasons are the construction of affordable housing and the upcoming power rationing and elimination of outdated production capacity, which are the main factors. In the off-season, ten stocks are obviously undervalued.
For the first half of the year, the cumulative investment in key projects in the region has reached 59.43 billion yuan, completing 16.81 billion yuan more investment than last year, growing by 39%, completing 40% of the annual target, and it is expected that investment intensity in the second half of the year will still be significantly higher than in the first half.
Accelerated investment in Xinjiang, expecting better performance in the second half. As the only large steel enterprise in Xinjiang, the company's products have a market share exceeding 70% in Xinjiang, and its growth is closely related to Xinjiang's economic growth rate and investment growth rate. It is understood that Xinjiang's economic growth rate in the first quarter of this year was 1.8 percentage points higher than the national average, and it is expected that the growth rate in the first half of the year will still be faster than the national level of 9.6%. In terms of investment, Xinjiang has increased railway, highway, pipeline, and power infrastructure construction this year, arranging 252 key projects for the whole year, including 40 newly started key projects, planning to complete investments of over 150 billion yuan.
For the entire year, the company's new product development volume increased from 4 million tons to 20 million tons. Among the sold products, specialty steel accounted for 51.3%, increasing by 9.3 percentage points compared to 2009. The company's comprehensive material utilization rate improved by 0.4 percentage points year-on-year, and all quality indicators for key products were better than the previous year. The incremental production and quality improvement of new products, specialty steel, and branded products played an important role in enhancing the company's product effectiveness capabilities. Wide-thick plate products produced under temperature control and heat treatment conditions between 10 mm and 100 mm were approved through EU CE certification registration. American standard SS rail was exported to Saudi Arabia, Mexico, Brazil; railway steel rails received the title of "National Customer Satisfaction Product"; high-speed rail at 350 km/h achieved the highest production and sales volume nationwide in 2010; producing low-cost, environmentally-friendly hot-rolled dual-phase steel using CSP production lines was a world-first; seamless steel pipe products made significant progress in market expansion, etc.
Yiti Steel (600581): First-half performance increased by 18.6%, in line with expectations
The adjustment of major product prices in August is in line with our expectations. On the one hand, during the "12th Five-Year Plan", the group plans to add nearly 300 million tons/year of iron ore production capacity, requiring at least 28 billion yuan in investment; on the other hand, the company's convertible bonds worth 3 billion yuan will mature at the end of 2012, posing a certain potential financial pressure. We judge that the company will successfully complete the acquisition of Hanbao in 2011 and start a targeted issuance to acquire mining assets no later than the end of 2012, thereby achieving "two birds with one stone" (refinancing, alleviating financial pressure).
Main business profitability will gradually improve starting from autumn 2011. According to historical patterns, the inversion of hot-rolled coil and rebar prices usually indicates a temporary bottom in steel prices, and this has already persisted for three consecutive weeks, suggesting that steel prices are about to stabilize and recover. The full commencement of affordable housing construction by the end of November this year provides logical support for this conclusion; currently, the price ratio of stainless steel to ordinary carbon hot-rolled coil has touched the low point since the financial crisis, and after three times touching this low point since 2010, the price ratio of stainless steel relative to ordinary steel has climbed. These factors will help promote short-term improvement in the company's main business; from a long-term perspective, we judge that the steel industry still has the potential to recreate the "mummy" revival scenario, benefiting the company.
It is estimated that the company will achieve fully diluted EPS of 0.250 yuan, 0.349 yuan, and 0.434 yuan in 2011-2013 respectively, growing by 21.68%, 39.69%, and 24.41% year-on-year respectively, corresponding to tonnage net profits of 67.43 yuan, 91.60 yuan, and 111.81 yuan respectively.
Bar products are the mainstay, with strong profitability. The company's total rolling material capacity is around 4 million tons, among which bar products are the mainstay, with a capacity of around 1.6 million tons. In 2010, bar products contributed revenue of 7.94 billion yuan, accounting for 61.7% of total revenue. At the same time, the gross margin for bar products was as high as 14.3%, but due to lower gross margins for other products, some products even incurred losses, leading to an overall gross margin of only 10.5%. Due to outstanding profitability, bar products contributed 1.14 billion yuan in gross profit in 2010, accounting for a high proportion of 88.4% of total gross profit, clearly demonstrating the advantages of bar products as the mainstay.
Profit forecast: Considering the strong profitability of the company's main products, excellent resource advantages, and significant performance elasticity, we estimate that the company's EPS for 2011-2013 will be 0.82 yuan, 0.94 yuan, and 1.05 yuan respectively, corresponding to a PE of 12X, 10X, and 9X as of the closing price on May 19. We give the company a "Recommend-A" rating. We caution about the risk of continuous policy tightening and the continuous slowdown in fixed asset investment growth.
Mining assets are expected to be injected after Hanbao. On the one hand, during the "12th Five-Year Plan", the group plans to add nearly 300 million tons/year of iron ore production capacity, requiring at least 28 billion yuan in investment; on the other hand, the company's 3 billion yuan convertible bonds will mature at the end of 2012, posing a certain potential financial pressure. We judge that the company will successfully complete the acquisition of Hanbao in 2011 and start a targeted issuance to acquire mining assets no later than the end of 2012, thereby achieving "two birds with one stone" (refinancing, alleviating financial pressure).
Investment logic
The 8% price adjustment is in line with our expectations.
Main business profitability will gradually improve starting from autumn 2011. According to historical patterns, the inversion of hot-rolled coil and rebar prices usually indicates a temporary bottom in steel prices, and this has already persisted for three consecutive weeks, suggesting that steel prices are about to stabilize and recover. The full commencement of affordable housing construction by the end of November this year provides logical support for this conclusion; currently, the price ratio of stainless steel to ordinary carbon hot-rolled coil has touched the low point since the financial crisis, and after three times touching this low point since 2010, the price ratio of stainless steel relative to ordinary steel has climbed. These factors will help promote short-term improvement in the company's main business; from a long-term perspective, we judge that the steel industry still has the potential to recreate the "mummy" revival scenario, benefiting the company.
Event: On June 27, 2011, the company held the second extraordinary shareholders' meeting of 2011, deliberating and approving the proposal "On Agreeing to Participate in Land Use Rights Auction by Third-Level Holding Subsidiary Wan Jun Real Estate (Baotou) Co., Ltd."
Risk warning: (1) Market competition risk; (2) Company operation risk.
Considering the expectation of Hebei Iron & Steel Mining's injection, we price Hebei Iron & Steel at 15.5-17 times PE for 2012, corresponding to a target price of 5.41 yuan - 5.93 yuan within the next six months. This represents an increase of 14.76%-25.86% compared to the closing price on July 15, 2011. We initiate a "Buy" rating for the first time.
Profitability weakened year-on-year in the first half of the year, rebounded in the second quarter. The company's revenue growth rate in the first half of the year was 23.15%, and the net profit growth rate attributable to the parent company was 18.6%, with smaller performance growth compared to revenue growth, indicating that the pressure brought by cost increases in the first half of the year was still relatively large, partially eroding the gains from steel price increases. According to calculations, the net profit margin for the first half of the year was 2.78%, less than the 2.88% from the same period last year, with weakened profitability. However, dynamically speaking, there were signs of improvement in profitability during the second quarter as iron ore prices adjusted somewhat during this period, with the net profit margin already rising to 3%, and a 17.52% increase in revenue bringing a 23.63% increase in net profit.
Internal potential excavation still has great potential. Mainly reflected in: (1) If its raw material procurement costs align with those of Xin Xing Cast Pipe (000778), located in Hebei, it means an increase in tonnage net profit by 69 yuan, increasing EPS in 2010 by 121%; (2) In 2010, the company's administrative expense ratio was 3.85% (0.72 percentage points higher than the average of comparable companies), increasing by 0.96 percentage points year-on-year, mainly due to repair costs (accounting for 31% of administrative expenses) increasing by 176%. We believe that there is a possibility of slight reductions in the future;