Weak GP outlook
Industrial steel market momentum slowing. We noted that the decline in steel usage by the machinery sectors was widening over the last quarter. We are concerned that weaker manufacturing activities would cloud the company outlook, given its highest revenue contribution is from flat steel products.
Cloudy outlook for 2022. Despite the company setting a flattish production and sales target for this year, the rising input cost has squeezed the quarter-to-date unit steel GP performance. Accordingly, we cut our FY22F/FY23F earnings on a lower steel price assumption. We expect BaoSteel’s unit GP to contract to RMB668/tonne and RMB718/tonne in 2022/2023, respectively.
Parent’s industry consolidation intact. BaoWu Group accelerates merger with industry peers, with its target capacity expansion to reach 150m tonnes or >11% of China’s total capacity to become China’s largest. The move would support the continued increase of the company’s concentration in the China steel industry.