Maanshan Iron and Steel Co., Ltd. has a strong profit growth in 2021, and the market will face difficulties.
Maanshan Iron and Steel Co., Ltd. reported a net profit of 5.3 billion yuan in 2021, + 169% compared with the same period last year, thanks to rising prices and expanded profit margins. Year-on-year production and sales volume in 2021 was + 2.6% from 1.8% to 2,045,052 million tons, while the selling price was + 48.3% to 5154 yuan / ton, pushing profit margins to expand by 1.3 percentage points to 13%. Magang 4Q21 recorded a net loss of 1.2 billion yuan (3Q21: a profit of 1.9 billion yuan), mainly due to a 12.9% month-on-month drop in profit margin and a large impairment of 1.3 billion yuan. The company announced a cash dividend of 0.35 yuan per share (the dividend payout rate is 50.5%). In 2022, due to the deterioration of the real estate market, COVID-19 dynamic zero clearance and the weakening of the margin of double carbon policy and other factors, we expect the company's steel price / profit margin to decline compared with the same period last year. Maanshan Iron and Steel Co., Ltd. lowered its 22-year profit forecast to 4.5 billion yuan (previous value: 7.1 billion yuan). Maintain the "hold" rating of H shares (636 HK) and the target price of HK $3.20 (0.6 x 22e BVPS 4.49), and downgrade A shares (600808CH) to "hold" with a target price of 3.70 yuan.
4Q21 performance is dragged down by narrowing profit margins and large impairment
Maanshan Iron and Steel 4Q21 recorded a substantial loss of 1.195 billion yuan, mainly affected by the decline in profit margins and inventory impairment. Due to weak demand and cost drag effect, 4Q21 Maanshan Iron and Steel sales price fell 11% month-on-month to 4656 yuan / ton. According to Mysteel data, the average weekly apparent consumption of 4Q21 steel was 9.4 million tons, down 15.9 per cent from the same period last year and 11.9 per cent from the 2018-2020 average. In terms of cost, iron ore prices in the spot market fell sharply, and the price of 62.5% iron ore in Qingdao Port PB fell 39.4% month-on-month, dragging down steel prices. However, due to high iron ore inventories, Maanshan Iron and Steel has failed to enjoy the downward cost brought about by the fall in iron ore market prices, and its unit cost is basically flat compared with the previous month. According to estimates, 4Q21 Maanshan Iron and Steel's gross profit per ton decreased by 682 yuan / ton compared with the previous year, and the company's gross profit margin narrowed by 12.9 percentage points to 1.9%.
With falling demand and relaxed supply controls, the industry may face a difficult year.
The most important reason for the price rise / profit margin expansion of the steel industry in 2021 is supply control: 1H21 steel prices are supported by expectations of year-round production leveling, while 2H21 price increases are the result of concentrated large-scale production cuts that began in September-the weekly output of hot metal fell from 2.3 million tons in August to less than 2 million tons by the end of 2021. However, with the marginal weakening of the dual-carbon policy, supply controls are expected to be loosened this year. On the demand side, new home sales and new construction have dropped sharply since 4Q21 compared with the same period last year, and the signal of real estate stabilization seems unclear. In addition, novel coronavirus spread again, resulting in the suspension of activities on some construction sites. It is expected that the iron and steel industry may face a double decline in price / profit margin in the future, especially the construction materials which are highly dependent on demand.
Risk hint: the weakness of the real estate industry brings downside risks, and tighter production restrictions bring upside risks.