Strong performance in 2021 but high volatility, 4Q21 gross profit margin shrank sharply Angang shares (Angang) 2021 to achieve a net profit of 6.9 billion yuan (Huatai forecast 8.7 billion yuan, the cost exceeded expectations), an increase of 250% year-on-year, thanks to strong price and profit margin performance. The total production / sales volume was basically the same as the same period last year, at 24.8 million / 24.4 million tons respectively. The average selling price rose 37 per cent year-on-year to 5576 yuan per ton, and gross profit margin rose 0.5 per cent to 9.7 per cent. 4Q21's gross profit fell 85% month-on-month to 528 million yuan due to falling sales and falling gross profit margins, recording a net loss of 564 million yuan (3Q21 net profit 2.3 billion yuan). Due to the contraction of gross profit margin, we lowered the 23-year net profit forecast of Anshan Iron and Steel Co., Ltd., to 4.9 billion / 5.3 billion yuan (previous value: 5.4 billion / 5.8 billion yuan). Maintain "buy" for Angang H shares, lower the target price to 4.30 Hong Kong dollars (0.53x 22e BVPS 6.65 yuan), take into account the weak industry outlook, 25% discount to the company's average PB since 2016; upgrade A shares to "buy", with a target price of 4.20 yuan (20% over H shares, in line with the company's average premium for A shares to H shares since 2016).
4Q21 is dragged down by falling sales and shrinking gross profit margin
Due to the sharp decline in gross profit margin, Angang 4Q21 net profit fell month-on-month, recording a net loss of 564 million yuan.
According to our calculation, due to the production restrictions imposed by the government to reduce carbon emissions, the single-quarter sales of 4Q21 in Angang fell 18% month-on-month to 4.9 million tons. Due to weak demand, the average selling price fell 7 per cent month-on-month to 4656 yuan per tonne, while falling production caused unit costs to rise 3 per cent month-on-month. We estimate that the company's 4Q21 ton gross margin shrank from 634 yuan / ton of 3Q21 to 104 yuan / ton, and the overall gross margin decreased by 7.9% to 1.9% from the previous month, corresponding to a 85% drop in gross profit to 528 million yuan. The last single-quarter gross profit of Angang was less than 1 billion yuan and was still in 1Q16 (733 million yuan).
Steel prices may be weak in 2022, and plates are expected to be less affected by the crude steel production control policy introduced at the beginning of last year. The company's steel prices and gross profit margin are strong in 2021. However, with the weakening of the margin of the dual-carbon policy, we expect supply controls to be loosened this year. On the demand side, the weak real estate market and epidemic control in major areas cast a shadow over the outlook for steel consumption in 2022. However, due to the low correlation between plate and construction industry, we believe that Angang plate products will be less affected than long wood products, or benefit from the increase in export demand caused by rising overseas prices.
Reduce the target price, but maintain the "buy", the valuation is attractive, taking into account the contraction of Angang gross profit margin, we lowered our 23-year profit forecast to 4.9 billion / 5.3 billion yuan (previous value: 5.4 billion / 5.8 billion yuan). For Angang H shares, we maintain a "buy" rating, lowering the target price from HK $5.77x 2021 forecast BVPS to HK $4.30 (0.53x 2022 forecast BVPS), which is a 25% discount to the company's average PB since 2016. considering the weak industry outlook, for Angang A shares, the company's valuation is attractive and the market has fully digested the weak industry outlook. The target price is 4.2 yuan, which is 20% higher than the H-share premium, which is in line with the company's average premium for A-H shares since 2016.
Risk tips: supply restrictions are relaxed; demand is lower than expected.