1H22 industry is under significant pressure, net profit is down 67% compared with the same period last year.
Angang 1H22 achieved a net profit of 1.72 billion yuan, down 67.1% from the same period last year, mainly due to the deterioration of supply and demand in the industry and high prices at the end of raw materials. 1H22's steel production fell 7.1 per cent year-on-year to 12.67 million tons, while steel sales fell 3.6 per cent to 13.03 million tons. Gross profit margin shrank by 6.8pct to 4.5 per cent year-on-year, resulting in a 61.5 per cent year-on-year drop in main business profits. Under the implementation of the production reduction policy, we expect the iron and steel industry to improve in stages in the second half of the year, but the lack of discipline in industry production and the demand pressure caused by the potential overseas recession, the reversal probability of the industry is low. We adjusted the steel benchmark price and the raw material price forecast, and lowered the annual profit forecast for 22-23-24 to 4.77 billion yuan (the previous value: 49.4 soybean 533 million). The target price of the company's PB H shares has been reduced by 16% by 21% to 3.50 yuan (20% premium to Hong Kong shares) / HK $3.40 (0.46 x 22e BVPS), which is 35% lower than the company's average price since 2016 due to the weak outlook for the industry.
Rising 2Q22 costs drive profits to shrink sharply year-on-year / month-on-month
From the 2Q22 point of view, affected by the epidemic in major consumer areas in the second quarter of this year and real estate sales continued to deteriorate, the company's steel sales fell 2.0% / 9.7% compared with the same period last year. Although the average selling price of 2Q22 steel rose slightly by 3.3 per cent from the previous month, the cost of major raw materials rose more significantly, especially due to the global energy tension caused by the conflict between Russia and Ukraine. The market price of 2Q22 coking coal rose about 22 per cent month-on-month, and the company's steel production cost rose 7.8 per cent month-on-month. We estimate that the company's 2Q22 per ton gross margin fell to 178 yuan from 385 yuan in 1Q22, and the comprehensive gross margin shrank 4.1 percent to 2.4 percent month-on-month. Angang 2Q22 net profit fell 84% month-on-month / year-on-year 94% to 230 million yuan.
The 2H22 industry may rebound in stages, but the expected persistence is insufficient and the reversal probability is low. Under the background of relaxed energy consumption control and no clear policy guidance for the reduction of crude steel production throughout the year, steel production continues to rise month-on-month, while demand-side performance is weak affected by the epidemic and real estate. Especially after entering June, due to the failure of strong expectations of improved demand, industry expectations were pessimistic, steel prices accelerated downward, and the industry suffered large losses. Previously, the government said it would further reduce crude steel production this year, although the extent of the reduction is not clear, but the supply reduction brought about by policy regulation will help to rebalance industry supply and demand, or drive a phased rebound in steel prices. The reversal in steel prices depends on a strong recovery in demand or a higher-than-expected and sustained policy of reducing production, and given the potential overseas recession and the persistent low prediction of production reduction, we believe that steel prices will show a phased rebound rather than a strong reversal.
Risk hint: the implementation of steel production reduction policy is not as expected and the recovery of steel demand is weak.