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BAOSHAN IRON&STEEL(600019):EARNINGS REMAIN STABLE DESPITE HEADWINDS;GROWING STEADILY DESPITE CYCLICAL FLUCTUATIONS

BAOSHAN IRON&STEEL(600019):EARNINGS REMAIN STABLE DESPITE HEADWINDS;GROWING STEADILY DESPITE CYCLICAL FLUCTUATIONS

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,  3Q22 results slightly miss our expectations
  Baoshan Iron & Steel (Baosteel) announced its 3Q22 results: Revenue grew 4.3% YoY and fell 3.2% QoQ to Rmb94.60bn, and attributable net profit dropped 74.3% YoY and 58.8% QoQ to Rmb1.67bn. Its results slightly miss our expectations due to high raw material prices.
  Sales volume of steel continues to increase despite headwinds. In 3Q22, sales volume of Baosteel’s steel grew 25.0% YoY and 0.5% QoQ to 13.04mnt.
  Price decline leads to weaker profitability. In 3Q22, the firm’s per-tonne ASP fell Rmb1,368 YoY and Rmb597 QoQ to Rmb5,553; gross profit per tonne dropped Rmb784 YoY and Rmb292 QoQ to Rmb284; and net profit per tonne dropped Rmb495 YoY and Rmb185 QoQ to Rmb128.
  Expenses edged up due to delayed R&D progress. In 3Q22, per-tone expenses dropped Rmb39 YoY but rose Rmb4 QoQ to Rmb140. Specifically, R&D expense increased Rmb45 QoQ to Rmb273, as COVID-19 weighed on its R&D.
  Financial structure continues to improve; cash flow increases. As of end-3Q22, Baosteel’s liability-to-asset ratio fell 2.0ppt YoY and rose 1.5ppt QoQ to 45.9%. Net gearing ratio increased 2.1ppt YoY and dropped 4.3ppt QoQ to 20.7%. Its operating net cash flow jumped 597.9% YoY and 64.8% QoQ to Rmb9.31bn. Accounts receivable financing dropped 63.8% YoY, and inventory fell 10.9% YoY and 13.7% QoQ.
  Trends to watch
  Reforming amid headwinds; likely to navigate through the cyclical downturn on organic development and M&A. 1) Reducing costs to improve competitiveness. As of end-3Q22, the firm reduced cost by Rmb8.48bn, thereby improving its competitiveness. 2) Increasing sales of high-end products; product structure continues to optimize. Sales volume of its high-end steel products reached 18.76mnt at end-3Q22. Specifically, sales volume of grain-oriented silicon steel (GOSS), cold-rolled high-strength steel for vehicles, and non-oriented silicon steel for alternative-fuel vehicles increased 10.6%, 10.8% and 61.3% YoY in 3Q22. These steel products are an important growth driver of the firm’s per-tonne profit. 3) Upbeat on M&A. The integration in the steel industry is accelerating. As a competitive subsidiary of Baowu, Baosteel will likely take the lead in integration and M&A in the steel industry, in our view. We expect its market share to expand steadily and believe that the firm will grow supported by management strengths and economies of scale.
  Low valuation, high dividends build margin of safety; expecting revaluation. We think that the market’s pessimistic expectations on the steel industry have been fully priced in. Baosteel is trading at 0.58x P/B (most recent quarter, vs. historical bottom of 0.53x). It maintains stable and high dividends and low valuation; therefore, we think it has a high margin of safety. We expect a revaluation, as Baosteel’s profitability has remained stable, and we believe that the organic development and external expansion will unlock growth potential.
  Financials and valuation
  Given solid steel prices, we expect higher product prices of Baosteel and raise our revenue forecasts 7.7% and 7.5% to Rmb366.0bn and Rmb366.6bn for 2022 and 2023. As the firm stocked up its inventory when prices were high and may therefore drag down the firm’s profit, we lower our GM assumptions and cut our earnings forecasts 21.7% and 12.4% to Rmb13.5bn and Rmb18.2bn for 2022 and 2023. The stock is trading at 8.3x 2022e and 6.2x 2023e P/E. Given the good prospect of the company, we maintain our TP of Rmb7.39 (12.2x 2022e and 9.1x 2023e P/E), offering 46% upside.
  Risks
  Worse-than-expected COVID-19 conditions; global economy deteriorating rapidly; product structure optimization disappoints.
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   【免责声明】本文仅代表第三方观点,不代表和讯网立场。投资者据此操作,风险请自担。

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