\u3000\u3000 Fushun Special Steel Co.Ltd(600399) (600399)
Event: Fushun Special Steel Co.Ltd(600399) is the core recommendation company of Guosheng military industry team. It has fallen by 27.13% since the beginning of 2022, ranking the eighth in the whole market, but we are still firmly optimistic. The reason is:
First, the reason for the adjustment of Fuzhou iron and Steel Co., Ltd. is only short-term factors and does not change the long-term growth logic:
1. Short term performance fluctuations caused by phased factors have been fully revealed in 2021q4. The company has released the performance forecast for 2021. It is expected that the company will realize the net profit attributable to the parent company in 2021 (RMB 728 ~ 815 million, with a year-on-year increase of 31.98% ~ 47.74%). In a single quarter, the company will realize the net profit attributable to the parent company in 2021q4 (RMB 43 ~ 130 million, with a year-on-year increase of – 70.75% ~ 11.56%). The reasons for the fluctuation of short-term performance had been predicted in the announcement of the third quarterly report: it was mainly affected by phased factors such as the national capacity restriction policy of the steel industry, the power restriction policy, the rise of energy and raw material costs and so on.
2. The market is too worried about the impact of rising energy prices and profits of civil products, while ignoring the means of improving quality and efficiency of the company. Energy price and other cost side. In 2020, the company’s fuel and power cost will be RMB 676 million. The impact of the slight rise in electricity price and the rise in gas price in winter is limited. Civil products are mainly covered costs, and there is indeed cost side pressure in the short term. However, we believe that the core judgment is what means the company can use to improve quality and efficiency to cover adverse changes on the cost side or bring other favorable changes:
1) impact of raw material price: according to the 2020 annual report, raw materials account for 60.5% of the total cost, and fuel power accounts for 13.9%. The cost of raw materials is the top priority of the impact. We tend to think that the price trend of nickel and cobalt in 2022 is conducive to the decline of the cost side.
2) price increase at the product end: due to the fact that the supply of three high and one special products is in short supply, it is reasonable for the price of raw materials to rise, and this can also be expected.
3) expansion of new production capacity: 2022 is the first year for the gradual release of expanded production capacity of Fuzhou iron and Steel Co., Ltd. according to the 2021 semi annual report, equipment such as fast forging machine and vacuum induction furnace will be put into operation in 2022h1, and the output will continue to increase.
4) appearance of process and scale effect: continue to improve the yield of special steel and the scale effect after batch production will appear rapidly after the increase of equipment.
5) improvement of civil product benefits: expansion of civil product categories to improve capacity utilization, other cost reduction measures, etc.
Second, the reason why we are still firmly optimistic about Fuzhou iron and steel is still the core card enterprises with very scarce supply on the road of the two machine competition:
1. The fundamental trend of the two machine industries has not changed. The two aircraft track “aeroengine + gas turbine” is the best track with thick snow on Changpo in the field of military industry. It is a typical competition track with large space for long-term growth, high barriers and good pattern. The four growth logics have established a sustained and rapid growth period of more than 10 years, giving birth to a trillion level track: the mass production of major models such as ws10, the continuous iterative production of new models, the rapid opening of the maintenance market, and the acceleration of the industrialization process of commercial development. In addition, there is the continuous expansion of civil market demand such as gas turbine and nuclear power.
2. The high barrier and industrial pattern of deformed superalloy products in Fuzhou iron and Steel Co., Ltd. have not changed. Superalloy has created a good industrial competition pattern with its high barriers, which are reflected in: 1) superalloy materials have high requirements for R & D strength and experience accumulation; 2) Downstream aircraft launch and other products also require very high quality stability. Once they enter the user supply chain system, they are generally not easy to replace; 3) Mass production and small batch production are completely different, which should take into account the influence of batch and yield. Fushun Special Steel Co.Ltd(600399) has the scientific research capability and process technology that Chinese counterparts cannot surpass. It is an important R & D and production base for military supporting materials, and has significant scale advantages in the field of military products. High barriers create an industrial pattern characterized by oligarchy, and it is difficult to have new entrants, resulting in the long-term and high deterministic growth of Fuzhou iron and steel.
3. Fuzhou iron and Steel Co., Ltd. is the core slot enterprise on many racetracks such as aeroengines, missiles and military aircraft, and its supply scarcity has not changed. Fushun Special Steel Co.Ltd(600399) accounts for more than 80% of China’s aerospace deformed superalloy market, and is the core slot enterprise of the aviation development track; High strength steel accounts for more than 95% of the market, Fushun Special Steel Co.Ltd(600399) takes the lead in R & D and production of A100 steel and 300M steel in China. The products are widely used in key components such as aircraft landing gear, aero-engine shaft, missile and ship shell. Therefore, Fuzhou iron and Steel Co., Ltd. is also a core supplier of “military aircraft, missile” and other products. The large-scale loading of military aircraft and missile will also drive the continuous growth of high-strength steel demand.
4. The trend of long-term and sustained growth in the performance of Fuzhou iron and steel has not changed. As mentioned above, there are many ways to solve the short-term cost pressure. We need to look at the long-term cost capacity of Fuzhou iron and Steel Co.: at present, the market demand for deformed superalloys in China’s aerospace field is very strong, and the situation of short supply is very prominent. On the one hand, the high growth of the industry brought by comprehensive war preparation and the increasing market demand for commercial aviation and gas turbines; On the other hand, there is still much room for improvement in domestic substitution. Therefore, the long-term sustainable growth of Fuzhou iron and Steel Co., Ltd. has high certainty, and the key lies in the rhythm of production expansion. We believe that Fuzhou iron and Steel Co., Ltd. has a sustainable driving force to maintain 30% ~ 50% performance growth in the next 5 ~ 7 years.
Investment suggestion: Fushun Special Steel Co.Ltd(600399) is the cornerstone enterprise of China’s large-scale construction of military equipment. The three high and one special products have a high market share in high barrier fields such as aviation development, military aircraft and missiles, and are expected to be maintained for a long time, which means that embracing Fuzhou iron and steel is the best choice
