Pioneer continues, four beams and eight columns write a new chapter of infrastructure

1 Metallurgical giant pioneer succession, four beams and eight pillars comprehensive development

1.1 Metallurgical engineering national team with a long history and rich deposits

The company is one of the world's largest engineering construction integrated enterprises, is the largest domestic market share, the longest operating history, the strongest professional design of metallurgical engineering contractors, in China's metallurgical industry construction field has a leading position.

Since the 1940s, the company has participated in the planning, design and construction of almost all large-scale iron and steel conglomerates in China, such as Angang, Bensteel, Wuhan Iron and Steel, Baotou Iron and Steel, Panzhihua Iron and Steel, Masteel, Baosteel, Tiigang, Shagang, etc., and is a leader in the construction of China's metallurgical industry.

The company pays attention to the expansion of overseas projects, has opened up the metallurgical engineering contracting market in dozens of countries, and completed a large number of projects with important influence and good economic benefits.

The company has 12 class-A research and design institutes, 15 large-scale construction enterprises, 5 comprehensive Class-A design qualifications and 42 special grade construction general contracting qualifications, 27 national science and technology research and development platforms, a total of more than 40,000 patents, won 82 China patent awards.

The company takes advantage of its metallurgical engineering whole industry chain system and strives to build a national metallurgical construction and operation service team.

The development of the company can be roughly divided into three stages:

In the first stage (2008-2012), the company's development slowed down due to multiple factors: After the company went public, it tried to diversify its business at the request of the group, and the cost increased due to business expansion; Coincided with the deep adjustment of the economy after the financial crisis, the domestic steel overcapacity, the serious contraction of the market, multiple factors led to a sharp decline in the company's performance in 2011, and a large loss in 2012.

The second stage (2013-2015) integrates the advantages of the industrial chain and focuses on the main industry of metallurgy: In the face of the dilemma of losses, the company actively shrinks its business lines, focuses on the main business of metallurgical engineering, appropriately extends the industrial chain outward relying on the advantages of the traditional main business, identifies the first batch of scientific and technological innovation of the company in 8 major parts and 19 business areas in the metallurgical field according to the process, integrates the whole industrial chain resources such as research and development, consulting, design, equipment, construction and operation, and creates the overall framework of the metallurgical sector.

In the third stage (2016-present), improve the level of green intelligence and build core competitive advantages: in the face of the trend of green and intelligent upgrading of the global steel industry, the company has twice focused on the main industry of metallurgy, emphasized technological innovation, improved the integration advantage of the whole industrial chain, and advanced to the high-tech and high-quality construction and emerging industries.

As of the first quarter of 2023, the actual control of the company is the State-owned Assets Supervision and Administration Commission of the State Council, and the controlling shareholder is MCC Group, which holds 49.18% of the company's shares. The company's business covers metallurgical construction, housing construction infrastructure, real estate development, equipment manufacturing, resource development and other fields.

With metallurgy as the core, the company actively expands into non-metallurgical fields and other fields, promotes the optimization and adjustment of the "four beams and eight pillars" industrial system, and forms four business segments of metallurgical construction, engineering contracting, emerging industries, and comprehensive real estate as "four beams". The business layout of "Eight Pillars" is metallurgical engineering and operation service, mine engineering and operation service, core equipment and steel structure, housing construction and urban renewal, transportation municipal and other engineering, ecological environmental protection and cultural tourism engineering, new energy and mineral resources development, green health and smart real estate.

1.2 Project contracting supports incremental revenue, and the resource development business is profitable

Revenue and profit grew steadily, and the "14th Five-Year Plan" reached a new high. In 2022, the company's operating income is 592.669 billion yuan, YOY+18.4%, and the CAGR from 2016 to 2022 is as high as +18.0%. Since 2017, the revenue growth has accelerated, maintaining a high growth rate of more than 17.0% every year; In 2022, the net profit of the company returned to the mother was 10.272 billion yuan, YOY+22.7%, and the CAGR from 2016 to 2022 was +11.40%. Affected by the delayed construction of the epidemic, the growth rate of the net profit returned to the mother in 2020-2021 declined from 19.1% to 6.5%, and the high growth rate returned in 2022. In the first quarter of 2023, the growth trend of 22 years continued, achieving operating income of 144.453 billion yuan, YOY+22.4%, and net profit of 3.37 billion yuan, YOY+25.8%.

The scale of newly signed contracts is strong, and the proportion of project orders is increasing year by year.

In 2022, the company's new signed orders will reach 1343.57 billion yuan, YOY+11.5%, and the CAGR from 2016 to 2022 will be +17.8%, with a high compound growth rate. In 2020, the new signed orders will break through the trillion mark, with a year-on-year growth rate of +29.5%, and thereafter maintain a scale of more than one trillion yuan every year. In the first quarter of 2023, the newly signed orders were 325.81 billion yuan, YOY+2.1%. As the company focuses on the main business of engineering, the proportion of engineering orders continues to rise, and the new engineering orders signed in 2022 are as high as 130.45 billion yuan, accounting for 96.8%, and the new engineering orders signed in the first quarter of 2023 are 314.57 billion yuan, accounting for 96.6%.

Project contracting contributes core revenue, and the profit of resource business is clean.

In terms of revenue, in 2022, the company's engineering contracting business generated revenue of 550.44 billion yuan, accounting for 92.9%, an increase of 7.2 pct compared with 2016, accounting for an increase year by year.

In other businesses, equipment manufacturing and resource development accounted for about 2.5% and 1.5%, and real estate development accounted for a decrease year by year, from 10.3% in 2016 to 3.8% in 2022, which was caused by the company's focus on the main business of engineering and construction contracting and optimization of business structure.

In terms of profitability, the gross profit margin of resource development business increased from 11.5% to 36.4% in 2016-2022, which is much higher than other businesses. In 2022, the gross profit margin of engineering contracting and equipment manufacturing will be 9.0%/11.6%, respectively, which has stabilized at about 10% in recent years. With the domestic real estate industry entering a period of stable development, the real estate business gradually returned to rationality, and the gross profit margin dropped from 27.2% in 2016 to 11.0% in 2022.

During the period, the rate was optimized year by year, and the net interest rate remained stable.

In the first quarter of 2023, the company's period expense ratio decreased to 4.7%, down 2.7 pct from the 2017 high, mainly due to the company's continuous optimization of business processes and a significant decline in management expense ratio.

Affected by the price fluctuations of upstream raw materials, the company's high production costs in recent years led to a decline in gross profit margin, and the gross profit margin in the first quarter of 2023 was stable at 9.5%, down 3.6 pct from the 2017 high. As the period expense ratio decreases year by year, offsetting the impact of the decline in gross profit margin, the net profit rate remains at about 2.2% in 2019-2022, and rises slightly to 3.0% in the first quarter of 2023.

1.3 Under the new assessment system of central enterprises, the valuation of the company is expected to be repaired

In 2023, the SASAC will adjust the main operating indicators of central enterprises from "two benefits and four rates" to "one benefit and five rates", and put forward the goal of "one increase and one stability and four improvements", which includes: "one increase", that is, to ensure that the total profit growth rate is higher than the national GDP growth rate; "Stability" means that the overall asset-liability ratio remains stable. "Four improvements", that is, the return on equity, research and development fund investment intensity, total labor productivity, operating cash ratio of four indicators further improved. Under the new assessment system, the operation flexibility of central enterprises has been improved, and more attention has been paid to the operation quality and profitability of central enterprises, which is conducive to repairing the valuation market of the company.

The new assessment system requires the efficiency of asset use and the ability to generate profits.

The assessment did not set a growth target for income, but required the total profit growth rate to be higher than the national GDP growth rate, and replaced net profit with ROE, reflecting the responsibility of SASAC to protect the rights and interests of investors, focusing on guiding central enterprises to pay attention to input-output efficiency, improve asset use efficiency and net asset earning ability.

In this context, central enterprises need to take the initiative to adjust the business structure and give up some "income generation without profit" projects. The gross profit margin of the company's new business such as mining resources development and polysilicon is higher than that of the main engineering contracting business. With the future production of overseas mines and the landing of polysilicon projects, the company's profitability will be fully enhanced and more value will be created for shareholders. At the same time, the assessment of full labor productivity will optimize the internal control process of central enterprises and further improve the profitability level.

Strengthen the awareness of cash flow security and focus on the improvement of sustainable investment capacity.

The new assessment system replaces the operating income ratio with the operating cash ratio, combined with the return on net assets, reflecting the regulatory requirements of SASAC "to have profit income and cash profit", and the central enterprises need to pay attention to the safety level of cash flow on the basis of book profits. In 2022, the company's revenue to cash ratio is 0.88, and there is a lot of room for improvement in the future. With the further landing of the assessment indicators, the company is expected to achieve a pattern of equal emphasis on safety and development.

The asset-liability ratio continued to improve, and R&D investment increased steadily.

In the context of the central enterprise control leverage target, the company's asset-liability ratio has continued to optimize since 2016, falling from 78.0% to about 72.0%, in line with the latest requirements of the SASAC for the asset-liability ratio to "maintain basic stability".

At the same time, the company continues to increase investment in research and development, promote electric arc furnace and hydrogen metallurgy and other processes, and constantly improve the level of research and development rates, reflecting the company's long-term goal of pursuing high-quality sustainable development.

2. The main industry of metallurgical engineering is based on the emerging industry to create the growth pole

2.1 Metallurgical engineering: Benefit from the two-carbon policy, green production line transformation rise

2.1.1 Industry policy end: The dual-carbon policy promotes industry rectification, and the electric arc furnace method has huge room for improvement

The central government has issued a heavy carbon emission reduction policy to optimize the industrial structure, increase the use of clean energy and reduce energy consumption per unit product for high-energy-consuming industries such as steel, non-ferrous metals and building materials.

In October 2021, The State Council issued the "Action Plan for Carbon Peak before 2030", requiring the industrial sector to speed up green low-carbon transformation and high-quality development, steel, non-ferrous metals and other industries to strictly implement capacity replacement, and strive to take the lead in carbon peak.

In November of the same year, the state issued the "14th Five-Year Plan" national clean production implementation plan key industries clean low-carbon transformation plan, requiring high energy consumption industries to complete the relevant production transformation, taking the steel industry as an example, during the "14th Five-Year Plan" period to complete 530 million tons of steel production capacity ultra-low emission transformation, 460 million tons of coking production capacity clean production transformation.

According to the national promulgation of the "double carbon" target, high-emission industries have successively promulgated the carbon peak target.

Take the steel industry as an example, by 2025, the steel industry needs to achieve carbon emissions peak; By 2030, the steel industry's carbon emissions are 30% lower than their peak, and 420 million tons of carbon emissions are expected to be reduced. At the same time, the steel industry should improve smelting technology, and vigorously promote the whole scrap electric furnace process, promote the joint regeneration and reuse of steel industry wastewater, and promote the electromagnetic strong oxidation of coking wastewater. With the deepening of the "double carbon" process, new processes and technologies in the industry are expected to be popularized.

In 2022, the carbon emissions of China's steel industry accounted for about 15% of the total carbon emissions of the country, and it is the industry with the highest carbon emissions in 31 categories of manufacturing, and its clean and intelligent transformation is crucial to the completion of the dual-carbon goal.

In 2022, China's steel production will be 1.018 billion tons, and the output of converter and electric furnace methods will account for 90%/10%. China's steel production capacity demand, high demand for raw materials, due to less scrap resources, it is difficult to support the supply of raw materials, so iron ore, limestone and coking coal as raw materials of the long process of steel making method occupies a dominant position, and the long process method of steel carbon displacement in 2-3 tons, much higher than the short process method of 0.8 tons of the level, resulting in the steel industry carbon emissions remain high for a long time.

From the short term perspective, to achieve the goal of double carbon needs to be carried out by the way of reduction replacement. From 2017 to 2025, China's steel industry plans to withdraw a total of 324.89 million tons of iron-making capacity, new iron-making capacity of 284.57 million tons, net withdrawal of 40.32 million tons, cumulative withdrawal of steel production capacity of 359.74 million tons, new steel production capacity of 320.7 million tons, net withdrawal of 39.67 million tons.

From a long-term perspective, smelting equipment needs to be transformed into short process method, green hydrogen smelting, carbon capture and other technologies.

Promoting the use of EAF smelting can significantly reduce carbon emissions in the steel industry, so the existing blast-converter production line can be gradually converted to EAF production line. As of 2021, China's electric arc furnace steelmaking capacity is 18,600 tons, with a CAGR of +13.4% in the past five years, but the proportion is far lower than the world's major regions and average levels.

In December 2020, the Ministry of Industry and Information Technology issued the "Guiding Opinions on Promoting the high-quality Development of the Steel Industry (Draft for comments)", which requires China to increase the proportion of electric furnace steel production to more than 15% by 2025, and strive to reach 20%, and the future of China's electric furnace smelting method of steel making has huge room for improvement.

2.1.2 Company side: The whole industrial chain of metallurgy has significant advantages, and hydrogen metallurgy + intelligent transformation leads the future

Metallurgical technology is comprehensive, and the whole industrial chain has outstanding advantages. As the world's largest metallurgical construction contractor, the company has undertaken the planning, investigation, design and construction of the main production facilities of almost all large and medium-sized iron and steel enterprises in China, and is in an absolute leading position in the eight aspects of steel production process: its subsidiaries China Enfei and China Huaye are good at mining and mineral processing; MCC Changtian, MCC North, MCC coke resistance deep ploughing sintering and coking technology; Ccid is good at blast furnace ironmaking; MCC Tiangong, MCC Jingcheng and MCC South have advantages in the field of steelmaking and hot rolling, and the cold rolling technology is mainly promoted by MCC South. At present, the company occupies 90% of the domestic and 60% of the global metallurgical market, fully reflecting the hard strength of China's metallurgical construction with the advantages of the whole industrial chain.

Actively layout of hydrogen metallurgy process to speed up the short process iteration process.

In terms of process technology, the company has formed a number of advanced technical products by accelerating the research and development of core technologies and processes and centering on the goal of green intelligence.

Ccid, a subsidiary of MCC, put forward the main line of "hydrogen energy preparation-hydrogen smelting - CCUS", and realized the technical route of green low hydrogen metallurgy through three technical paths of hydrogen rich reduction low carbon blast furnace, hydrogen base shaft furnace direct reduction, and hydrogen base melting reduction based on high efficiency pre-reduction. Its subsidiary, MCC Jingcheng, is committed to the research of low-carbon metallurgical technology, has completed the research of gas refining technology based on dry process, and has mastered the technology of 𝐶𝑂2 extraction and deep processing.

In December 2020, the "MCC Jingcheng - Tang Steel International" consortium led by MCC Jingcheng won the bid for the hydrogen energy development and utilization project demonstration project of Hesteel, which officially opened the substantial pace of hydrogen metallurgy development in China, and is expected to promote the transformation of the steel industry from traditional "carbon metallurgy" to a new type of "hydrogen metallurgy".

Power production line transformation and intelligent operation and maintenance to create the second growth curve of metallurgical engineering.

In terms of engineering and technical reform, the subsidiary MCC Baosteel has outstanding advantages, with modern metallurgical production and operation service capabilities, and has experience in providing equipment maintenance, production and operation, technology upgrading and transformation services for large metallurgical enterprises at home and abroad. Metallurgical engineering and technical reform covers iron and steel enterprises, steel series, rolling series, public auxiliary facilities and so on.