Subdued steel market sentiment is likely to continue
• Subdued steel demand to cloud market outlook
• Risk of faster decline in steel price than production cost
• Cut FY22F/FY23F earnings on lower unit GP assumption
• Pegged to target multiple of 0.35x P/BV, lower part of the range during 2016-2018 (0.5x prior); downgrade to SELL
Earnings cut twice in two months
Investment Thesis
Subdued steel market sentiment is likely to continue. We noted that the decline in steel usage by the property and machinery sectors has remained over the last quarter. We are concerned that slower manufacturing activities would cloud the company outlook, given its highest revenue contribution is from flat steel products.
Cloudy GP outlook remains. The company setting a flattish production and sales target for this year. The rising input cost has squeezed quarter-to-date unit steel GP. Accordingly, we cut our FY22F/FY23F earnings on a lower steel price assumption. We expect AnSteel’s unit GP to contract to RMB211/tonne and RMB208/tonne in 2022 and 2023, respectively.
Carbon goal has limited short-term share catalyst. AnSteel has set its goals for ultra-low emissions and carbon reductions for its Anshan, Bayuquan, and Chaoyang bases. It has committed the capex investment needed for this purpose. However, the progress remains slow and is a limited share catalyst.
Valuation:
Our H-share TP of HK$2.7 is based on a 0.35x FY22F P/BV, pegged to the company’s lower end of its historical range during 2016-2018, against its expected ROE reverting towards a low single digit. Our A-share TP of RMB2.9 is derived based on a 0.45x P/BV, in line with its historical range and consistent with the historical price spread of the dual-listed counter.
Where we differ:
Our FY22F/FY23F earnings are below the consensus, in view of the concerns of declining GP.
Key Risks to Our View:
Unexpected industry supply or market demand could pose risks to our assumptions.