Profit Depth Callback Asset Quality Consolidation Still awaits Mid-term Logical Repair Valuation

 Net profit of steel plate in 2019H1 decreased by 40% year on year, and PE (TTM) was 6.8 times. In the first half of 2019, the supply side of the steel industry was relatively loose, the demand side was flat, and the cost side increased substantially, which led to a significant contraction of the profit level. The total net profit of 2019H1 steel plate plate is 29.2 billion yuan, down 39.7% year on year; the total non-net profit is 28.1 billion yuan, down 39.1% year on year; the average gross interest rate is 11.6%, down 3.9 PCT year on year; as of September 2, 2019, the PE (TTM) of steel plate is 6.8 times, and the valuation level is low.

Q2 deducted non-net profit increased by 67% annually in 2019, and earnings recovered in the short term. In the single quarter of 2019Q2, total net profit of steel plate was 18.4 billion yuan, up 70% annually, down 34% year-on-year; total non-net profit was 17.6 billion yuan, up 67% annually and down 32% year-on-year. Influenced by the warming demand, the boom of the steel industry has recovered in the short term.

The output of crude steel of listed steel enterprises in 2019H1 increased by 6% year on year, and the non-net profit per ton of steel deducted by 188 yuan. The total crude steel output of listed steel enterprises in 2019H1 is 147 million tons, up 6% year on year; the proportion of crude steel output in China is 29.9%, down 0.8 percentage points year on year. The supply elasticity still exists in the steel industry, and the output growth of unlisted steel enterprises is more significant. The non-net profit per ton of steel deducted in 2019H1 plate was 188 yuan per ton, down 42% from the same period last year.

The asset-liability ratio of the plate is stable, and PB is only 0.84 times. At the end of 201H1, the ratio of assets and liabilities of the steel sector was 58%, which remained stable compared with the beginning of the year; the total net assets of the steel sector were 639.7 billion yuan, an increase of 4 billion yuan compared with the beginning of the year; the balance sheet of the steel sector had been gradually consolidated; as of September 2, 2019, the market net ratio of the steel sector was nearly 0.84 times, and the valuation level was low.

In 2019H1, net operating cash flow and FCF decreased significantly. The total net operating cash flow of the H1 steel sector in 2019 was 36.9 billion yuan, down 43.7% from the previous year, mainly affected by the rise in mineral prices; the total capital expenditure was 29.539 billion yuan, up 22% from the previous year; and the total free cash flow (FCF) was 7.361 billion yuan, down 82.2% from the previous year. Cash flow of iron and steel industry declined as a whole.

The profit of iron and steel plate returns to rationality, which still needs to be repaired by the medium-term logically favorable support valuation. Since 2019, the profit of steel industry has declined significantly, and will return to rationality in the long run. At present, PE and PB valuation levels of steel plate are at a historic low level. If the medium-term policy of supply, demand and cost side is good, it is still expected to support the short-term valuation repair market, and we maintain the "overweight" rating of the plate.

It is suggested to pay attention to stocks with high profitability. Against the background of the downward trend of the long-term prosperity of the industry, we suggest that we pay attention to the high value-added and low-cost stocks: Daye Special Steel and Fangda Special Steel. The gross interest rate, ROE, ROIC and net profit per ton of steel of these two companies rank at the top of the steel plate, reflecting the profitability of the company in the industry.