2Q22 profits fell sharply month-on-month, industry supply and demand mismatch driven steel prices under pressure Maanshan Iron and Steel (Maanshan Iron and Steel) 1H22 profits fell 69.3% to 1.43 billion yuan compared with the same period last year. On a quarter-on-quarter basis, 2Q22's net profit fell to 174 million yuan, down 86.1 percent from 1Q22's 1.25 billion yuan. Industry demand failed to recover in the peak season in the second quarter and hot metal production continued to rise, steel prices fell from April and accelerated from June, and the steel industry suffered a higher proportion of capacity losses. Under the downward steel price, Maanshan Iron and Steel 2Q22's gross margin per ton of steel fell 46 yuan / ton to 411 yuan / ton compared with 1Q22, and the gross profit margin also dropped from 9.5% of 1Q22 to 8.8% of 2Q22. Based on the lower steel price forecast, we downgrade the annual net profit forecast of Maanshan Iron and Steel Co., Ltd. to 2.94 billion PB in 22-23-24 (previous value: 44.8 pound 46.9 trillion), and lower the target price of Amax H shares to 3.20 yuan (43% premium over H share price) / 2.60 Hong Kong dollars (0.52 x 22e max). Maintain "hold" based on the fact that the industry is already at the bottom and production is reduced or driven by a phased rebound in steel prices.
The production was stable and efficient, the product structure was further improved, and the R & D investment was maintained at 10.98 million tons and 10.7 million tons of crude steel and steel produced by 1H22, a slight decrease of 2.1% and 0.5% over the same period last year. While stabilizing production, the production efficiency was further improved, and the production indicators such as hot metal daily production, converter daily production and steel rolling output were further improved. At the same time, the company continues to promote product structure optimization and differentiation competitiveness, selling strategic, exclusive and leading products of 2.12 million tons, an increase of 12% over the same period last year, and wheel sales of 264000 pieces, an increase of 40.7% over the same period last year. Heavy H-beam, special steel products, round billets for wind power bearings, automotive steel and other products further expand and increase market share. The R & D cost of 1H22 remains at a high level of 2.06 billion yuan, and the investment intensity is better than that of most steel listed companies, which will lay the foundation for the company to further improve its product structure and enjoy the profit premium of high-end products in the future.
Industry profits are already at the bottom, production reduction or periodic rebound in steel prices 1H22 under the lack of production discipline in the steel industry, hot metal output continued to climb after the March heating season production limit and reached a high of 2.43 million tons / day in mid-June. However, the absence of traditional peak season demand in the second quarter under the influence of the epidemic and weak real estate led to weak destocking during the peak season and steel prices reflected more weak reality than strong expectations. The accelerated decline in steel prices in June led to a sharp increase in the proportion of loss-making capacity in the industry. In April, the NDRC made it clear that the production reduction would continue in 2022, and last week the Tangshan area began to define the reduction target. We believe that the subsequent implementation of production reduction will improve the current imbalance between supply and demand, and improve the relationship between supply and demand in the industry through the government's initiative to adjust the supply side, so as to drive a phased rebound in steel prices. Steel prices in 2023 will depend on the continuation of production cuts and the strength of China's economic recovery.
Risk hints: an earlier-than-expected and stronger-than-expected overseas recession; a decline in China's direct / indirect steel exports.