Although earnings improved month-on-month in 1Q23, losses were recorded
Ma Steel Co., Ltd. recorded a net profit loss of 509 million yuan in 1Q23, an improvement from 4Q22's loss of 1.52 billion yuan. The quarterly sales volume of steel products increased 4.6% month-on-month, and the combined unit production cost decreased by 22.6% month-on-month, offsetting the negative impact of the 14.4% month-on-month decline in steel prices. The gross profit per ton of steel improved significantly by about 520 yuan/ton over the previous month. We expect that it will be difficult to reverse the fundamentals of China's steel industry in 2023. Lack of production discipline on the supply side is the main factor limiting the rebound in profits. Maintaining the “holding” rating of Ma Steel Co., Ltd.'s A/H, the target price is 3.0 yuan (0.78x 2023E BVPS 3.8, 25% off the historical average to reflect the pressure on performance) and HK$1.9 (44% discount compared to A shares, in line with the current latest discount level). The forecast EPS for 2023-2025 is 0.06/0.08/0.16 yuan.
Production and sales have recovered month-on-month, and 2Q23 profits will still be under pressure
1Q23 achieved 4.82 million tons of steel production, a year-on-year increase of 4%/-7%. Sales were achieved at 4.81 million tons, an increase of 4.6%/-6% year-on-year. Production and sales both improved month-on-month, but they have not yet recovered to the same period last year.
Among them, longwood and board sales were divided month-on-month, with month-on-month increases of -7.5% and 19.5% respectively. Or affected by the boom in different downstream industries, board sales were driven by the relatively good recovery of the manufacturing industry, while longwood sales were greatly affected by real estate investment. After the company experienced a net loss of 760 million/1.52 billion in the 3rd Q/4Q, 1Q23's profit improved slightly, the loss margin narrowed to 509 million yuan, and gross margin improved 10.8 percentage points over the previous month to -0.3%. The 1Q23 company achieved an average price of 4,299/3,872/11,420 yuan/ton for plates/longboards/axles, a year-on-year change of -12.5%/-14.2%/2.2%, and operating income fell 14.5% during the same period. Against the backdrop of weak steel prices moving into trading, the company's 2Q23 profit may still be under pressure.
It is difficult for the 2023 steel industry to reverse variables. Phased fluctuations or the main tone. We expect that in 2023, China's steel industry will still operate under pressure and that it will be difficult to reverse variables. Phased supply and demand adjustments may cause narrow fluctuations in the industry. The industry's lack of production discipline remains the main factor limiting improvements in supply and demand and the sharp rise in profits. We expect China's apparent steel consumption to increase 2% year over year in 2023, but 2H23 steel exports may be weaker than 1Q23's strong performance. Since April, as iron water/crude steel production has continued to rise and apparent consumption has stagnated month-on-month, the rate of industry warehousing removal has been slower than in previous years, causing steel prices to switch from strong expected support to weak expectations. Currently, the instant profit of various steel varieties has fallen to the lowest level in the year, and the loss range has rapidly expanded. The industry's potential output leveling may help ease the conflict between supply and demand, but it may not constitute a reversal variable in the context of weak demand.
Risk warning: Real estate sales are weaker than expected; production control is weaker than expected.