Baosheng Media Group Holdings Ltd Q2 FY2023 Earnings Call

Distinguished investors and listeners, good afternoon. Welcome you to participate in the Baosteel 1H 2023 Results Release. First of all, please allow me to introduce you to the VIP guests and Board of Directors participating in today's meeting. They are the Baosteel Board Director, Mr. Zou Jixin; Baosteel Board Director, General Manager, Mr. Wu Xiaodi; Baosteel Inc. Board Director, Mr. Xie Rong; Baosteel Vice General Manager, Mr. Fu Jianguo and I myself, your old friend, the Vice GM of Baosteel and Secretary of the Board of Directors, Ms. Madam Wang Juan. As you all know, since the latter half of this year, both the capital market and the steel industry have entered quite a downturn. With this situation, I believe that you start to pay more attention to the industry as well as our company. Therefore, for our company during the half year, what did we do? What is our future plan? Also, what is our view on the industry? Now let's invite Mr. Zou Jixin, the Board of Directors of Baosteel Group, to give a presentation. Let's welcome Mr. Zou.

Distinguished investor friends, good afternoon. I’d like to sincerely thank all of you, our dear investment friends, for your long-term support to the Baoshan Iron & Steel Corporation Limited. Now I would like to represent the company to share our performances in the first half of this year while at the same time sharing our plans for the mid- and long-term. To give you an overview of the first half of this year, as you might know, the whole industry is experiencing a slump. Since the last half of last year, we haven’t seen an obvious recovery. The whole industry has entered into a margin or border of loss and profit, with a 45% loss rate among CISA member companies. The total profit from ferrous metal smelting in the rolling industry has declined 97.6% year-on-year. Nevertheless, we have overcome several negative factors, and our company's profit is still ranked number one, reaching about RMB6.52 billion. Our revenue stands at about RMB170.2 billion, with a net profit attributed to the parent company of ¥4.55 billion. The cash flow from operating activities, excluding finance companies, is at ¥11.31 billion, with EBITDA at ¥17.12 billion and EPS at ¥0.2. Our ROE stands at 2.32%. The reduction in profit is mainly due to the reduction in sales prices, leading to a decline of RMB18.1 billion when compared to the same period last year, while costs have also reduced, contributing about RMB13.1 billion. We also had some provision due to last year's provision for declining inventory value, which was released. Looking at Q2 compared to Q1, we have observed some increases. For example, our income increased to RMB179 million in Q2, while in Q2 we had over RMB200 million of increase and about RMB100 million of scale increase. Our EPS also grew in Q2 compared to Q1. The increase in Q2 can be attributed to several factors, including organizational reforms in our finance company that positively impacted operational performance. Facing a tough market situation, we adopted measures to cut costs and improve efficiency. For example, our ROE percentile value reached 79 in Q2 within the industry, and our profit per ton is at the 93rd percentile. We have also trailed several technological innovations. This year, our focus has been on integrating purchasing, production, and sales to better respond to market fluctuations and better serve our clients. Furthermore, we deepened our six reforms in purchasing various resources and implemented multiple bidding processes. Notably, we have managed to halve our inventory of iron ore compared to last year, signifying remarkable progress due to our reforms. In the first half of the year, we have also positioned ourselves more competitively in terms of product structure, optimizing our offerings under different bases and adjusting our sales strategies to focus on high-profit and high-market share products. For example, in the homogeneous product market, we have worked hard on the transformation of our marketing model while exploring opportunities in overseas markets. We have also invested heavily in R&D for unique leading products that meet market needs, and we have established technical working stations in key markets and customer bases to better serve them. Our commitment to reducing costs continues, with RMB2.99 billion saved in H1, achieving 102% of our annual target. Energy consumption has contributed over RMB0.7 billion in savings, and variable costs decreased by RMB1.63 billion. Additionally, process costs dropped by RMB106 per ton. Our strategic focus continues on maintaining our competitive position while enhancing our production management processes. In the first half of this year, we deepened our product management and continued promoting our million-thousand-billion strategy, aiming to achieve a gross margin of RMB1,000. In summary, the results from our integration of R&D, production, and sales have yielded promising outcomes. In the first half of this year, we executed the world debut of seven products, including a rapid rollout of unique products in high-demand sectors such as wind power development needing high-quality silicon steels. We also continue to see success in national projects with our products being applied in large-scale operations, including heavy plates and welding wire steel in major projects. Looking to the future, we signed a contract with Saudi Aramco and PIF on May 1st for a world-first green analog carbon footprint process and thick plate factory, the first overseas greenfield project in Baosteel's history. We target a DRI production of 2.5 million tons and a heavy plate output of 1.5 million tons in line with our sustainability goals. Beyond operational performance, we also focus heavily on meeting green and low-carbon production requirements, enhancing energy efficiency, and addressing the dual carbon growth goals set by national directives. As we navigate the rest of the year, we'll continue to monitor market conditions and adapt our strategies accordingly to maximize our operational efficiency and stakeholder value.

Thank you very much, Mr. Zou for your sharing. Just now Mr. Zou shared with us what Baosteel accomplished in the first half of the year and how they are dealing with the current economic slump. However, we still face significant challenges that require strategic responses. Mr. Zou has provided us with insightful information and an outlook on our future goals, but I believe our investors have many questions. Now, we will open the floor for a Q&A session. I would like to remind everyone that each analyst can only ask one question to allow more participants to engage.

Board Director Mr. Zou, good afternoon. I am a raw materials analyst from JPMorgan. First of all, I want to congratulate your company on its outstanding achievements in the first half of this year, as the entire industry has struggled and you still managed to produce a profit. This strongly indicates that Baosteel is leading the charge in cost management and product competitiveness. My question is, given the weak steel demand in China, what are your future overseas development goals, particularly regarding your project in Saudi Arabia? What timeline do you foresee for this, and will you consider acquiring any promising assets as well?

Thank you for your question. Our Saudi Arabia project has garnered significant attention. On May 1st, we held a signing ceremony in collaboration with Saudi Aramco and PIF. Since then, we have made considerable progress, including conducting global research and navigating the national approval process. Our priority is to commit all available resources to successfully establish this project in partnership with PIF and Saudi Aramco, developing it into the world's first green low carbon fixed plate steel project. Achieving success here will ensure strong market competitiveness and create positive social impacts. Overseas investments and expansions are indeed necessary for Baosteel as part of our internationalization strategy. We are exploring multiple projects and focusing on the Belt and Road countries, especially those that favor low-carbon energy investments. Our emphasis on green and low-carbon development is pivotal, especially since energy costs have been rising steadily. We are excited about further investments in potential markets like the Middle East, Saudi Arabia in particular. To reduce risk, we have developed a talent pool and enhanced management systems for overseas projects.

Thank you for your question, and thank you, Chairman, for your insightful response. Now, let's hear from an analyst from Citibank.

Thank you. I want to ask about the management system changes concerning the concept of 'one company multiple bases' you've discussed frequently. Can you elaborate on the operational center's role in this context?

The concept of 'one company multiple bases' has been part of Baosteel's strategy for over 10 years. I see this as evolving in three phases. The first phase began around 2013 with our initial construction projects. Our focus was on establishing steel production bases across various regions and developing talent management systems. The second phase revolved around performance integration, whereby we improved information sharing across bases to enhance centralized procurement and R&D. Now, we are progressing into a more refined 'operation center' model aimed at optimizing resource allocation among our various bases to increase production efficiency and continuity. This model enables us to respond dynamically to demand fluctuations while minimizing downtime and maximizing resource utilization. We aim for a more synchronized operation across our company to enhance our efficiency and profitability moving forward.

Thank you, Mr. Wu, for your detailed explanation. Let's hear from another analyst.

I have a question about how Baosteel ensures the quality of auditing results and manages potential risks.

Thank you for your question. It’s a concern that many investors share. Since the inception of our capital market, there have been rumors regarding falsified information in various companies. At Baosteel, we place great emphasis on the quality of our auditing processes. Our financial management system is continuously being enhanced to ensure that all our data accurately reflects our financial status. This is only possible with a skilled finance team, capable of producing authentic financial information. We have invested significantly in standardizing our accounting processes to unify our subsidiaries and branches under consistent accounting rules. Additionally, our robust internal control systems ensure reliable and standardized operations across all business activities. Our Audit Committee, alongside internal and external auditors, play crucial roles in maintaining our auditing integrity, allowing investors to trust our financial reports and analyses.

Thank you, Director Xie, for your in-depth response. Now, we'll invite another analyst from UBS to present their question.

Thank you, everyone, for your insights today. I wanted to ask about your capacity plans for 2024, specifically Baosteel's goal of reaching 80 million tons. How development is proceeding in that direction?

In our plans, we have stated that we aim to reach 80 million tons of capacity by next year. Achieving this 18 million ton growth hinges on several factors. First, there’s a significant push for high-quality development in the steel industry, supported by national policies that advocate for consolidation, restructuring, and the optimization of industry resources. Baosteel, as a flagship company, is positioned to capitalize on these trends. Over the past few years, we’ve built considerable advantages in technology and talent across our production bases. We are actively pursuing suitable M&A opportunities that align with our growth strategy, focusing especially on the Belt and Road nations and other markets that favor low-carbon initiatives. We are well-prepared and optimistic about achieving our capacity goals while navigating any challenges ahead.

Thank you for your question, Mr. Zou, for your thorough answer. Let's hear from a representative from Goldman Sachs.

I have a question for Mr. Fu Jianguo. With the steel industry expected to be integrated into the National Carbon Transaction Market next year, what impact do you anticipate, and how is Baosteel preparing for this shift?

Thank you for your question. This is a significant topic of interest. The carbon reduction mandate presents ongoing challenges for our industry, which accounts for around 5% of China’s GDP but approximately 15% of its carbon emissions. Our industry must adapt to upcoming policies regarding carbon taxation and emissions targets, necessitating substantial investment and technological reforms. We are closely monitoring policy developments and conducting necessary research to guide our actions. By 2026, we will need to adhere to stricter carbon reporting regulations. Although traditional processes and heavy asset reliance slow our transition, Baosteel is positioned strategically due to our technological advancements. We have already set a solid foundation in our carbon auditing system and are actively working to enhance our green energy initiatives. I am confident that we will navigate these changes responsibly and efficiently.

Thank you, Mr. Fu, for your comprehensive perspective. Now let's invite a representative from CICC to ask a question.

I notice local governments are announcing plans to reduce steel capacity or output; however, it seems raw steel production remains high. How do you see the supply-demand dynamics shifting post-September for Baosteel?

Thank you for your question. This topic has gained visibility recently. It is evident that the steel-making industry in China has faced challenges with oversupply for several years. The government has called for capacity control, and recent months have seen an investment squeeze. We expect to see reductions in capacity remain consistent as the industry transitions towards quality-driven outputs. Our actual production levels have increased, but we understand that maintaining profitability necessitates prudent decisions in accepting orders. Baosteel has actively coordinated with local governments for capacity allocation and positioning, allowing us to operate optimally without largely affecting our output strategy. We prioritize accepting profitable orders and strategically adjusting our production rates in response to ongoing and emerging market conditions.

Thank you for the insightful question, and I appreciate Mr. Wu's detailed response. Let's now move on to another analyst.

My question goes to Mr. Zou regarding silicon steel. We understand there's been a price drop this year. Can you elaborate on the causes and your planning for silicon steel going forward?

The price decline in silicon steel primarily results from increased supply in the market. Many companies are entering the silicon steel production arena, which has outstripped demand and led to an oversupply situation, especially in mid to low-end specifications. While competition is fierce, we excel in high-end production where profitability remains robust. Baosteel's strategic focus on silicon steel is a core element of our positioning in the market. We aim to be the top producer globally by strategically advancing our production capacity, optimizing our product structure, and investing in unique technologies that ensure our competitive edge against rivals. I can assure you that our investment in R&D and production capabilities will continue to bolster our performance in this vital segment of the market.

Thank you, Mr. Zou, for your detailed insights into our strategic focus. Before we conclude, let's take one more question.

I want to ask Mr. Wu about which steel products currently hold the highest profitability for Baosteel. Can you rank them for us?

At a broad level, our silicon steel is at the top, followed by auto steel, thick steel, and then pipe steel. Specific smaller segments may exhibit considerable variability in profitability, emphasizing the importance of responding efficiently to demand fluctuations. Additionally, our established systems enable us to constantly evaluate and adjust our product offerings in real-time, ensuring we focus on the most lucrative segments to secure sustainable profitability.

Thank you, Mr. Wu, for that insightful reply to the question regarding product profitability. This concludes our Q&A session today. We encourage you to reach out with further inquiries through our online question raising platform or contact our investor hotline after this results release meeting. Thank you all for your attendance today!