The profit in the third quarter fell 37% from the previous quarter, and the output dropped significantly.
Anshan Iron and Steel Co., Ltd. (Angang) reported 3Q21 profit: the net profit was 2.31 billion yuan, up 180% from the same period last year, but down 37% from the previous quarter. The net profit in the first three quarters was 7.49 billion yuan, up 465% from the same period last year. Profits declined in the third quarter compared with the previous quarter, mainly because the company took the initiative to reduce production to the corresponding government call to control annual production below the 2020 level.
The total output / sales volume of Angang in the third quarter was 5.87 million / 5.98 million tons, down 16% from the previous quarter, 16% from the previous quarter, and 11.5% from the previous quarter.
In addition, gross profit margin narrowed 1.7 percentage points to 9.8% month-on-month, affected by higher costs and lower production as a result of higher coke prices. We expect production / sales to decline further in the fourth quarter, with average prices and cost pressures squeezing margins or causing profits to decline. We have lowered our annual profit forecast for 21-22-23 to 8.7 billion / 5.4 billion / 5.8 billion (previous value:
The target price is reduced from HK $7.7 to HK $7.7 (0.72 times 2021E BVPS), which is in line with the company's average PB since 2016.
Adjust the sales structure to cope with the severe external environment
In the third quarter, Angang achieved a net profit of 2.31 billion yuan, an increase of 180 per cent over the same period last year, but fell sharply by 37 per cent from the previous quarter. The quarter-on-quarter decline in profit in the third quarter is not due to the company's operating problems, but to the severe external environment. On the production side, in response to the government's requirement that annual production should not exceed the 2020 level, Angang cut its third-quarter production by 16% (1.1 million tons) to 5.9 million tons (1H21 production: 17% year-on-year increase). The sharp cut in production also led to a rise in unit costs, offsetting the rise in average prices, resulting in a 1.7 percentage point drop in gross margin in the third quarter from the previous quarter. However, Angang has adjusted the production / sales structure at the same time, increasing the hot / cold rolled coil with higher profit margin and reducing the medium and heavy plate, large profile and wire rod with lower profit margin in order to maximize profits.
Fourth-quarter earnings may be weakened by further production cuts
Given that Angang's annual production / sales volume is 24.6 million tons / 24.6 million tons respectively, it needs to further cut production to 5.1 million tons in the fourth quarter to ensure that the total output for the whole year is lower than the 2020 level, which means the company needs to cut production by a further 15 per cent in the fourth quarter. In addition, steel profit margins face average price and cost-side pressure: 1) on the price side, we expect weak demand to continue until the end of the year with the advent of the traditional off-season. The peak demand season from September to October is sluggish, and steel prices have fallen instead of increasing in the past three weeks. 2) in terms of cost, the rise in coking coal prices has led to higher coke prices. We have lowered Angang's annual profit forecast for 21-22-23 to 8.7 billion / 5.4 billion / 5.8 billion and the target price to HK $5.77.72 times 2021E PB, which is in line with its average PB since 2016 to reflect the deteriorating demand outlook.
Risk tips: 1) supply restrictions are relaxed; 2) demand is lower than expected.