Cloudy GP outlook remains
• Subdued steel demand market to cloud 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 0.5x P/BV, lower part of the range during 2016-2018 (prior 0.8x); downgrade to HOLD
Lacking momentum
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 investment activities would cloud the company outlook, given its balanced revenue contribution from both long and 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 MaSteel’s unit GP to contract to RMB417/tonne and RMB420/tonne in 2022 and 2023, respectively.
Parent’s industry consolidation has limited near-term share catalyst. The BaoWu Group accelerates its mergers with industry peers, with its target capacity expansion to reach 150m tonnes or >11% of China’s total capacity, to become China’s largest. However, we believe that the move would have limited share catalyst in near term.
Valuation:
Our H-share target price (TP) of HK$2.7 is pegged to 0.5x P/BV, which is at the lower end of the historical range during 2016 and 2018, against its expected ROE contraction, which is expected to shrink to a mid-single digit. Meanwhile, our A-share TP of RMB4.0 is pegged to 0.9x 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 concerns about declining GP.
Key Risks to Our View:
Unexpected industry supply curbs or market demand could pose risks to our assumptions.
