2Q23 The pressure on supply and demand in the industry continued, and the loss margin increased month-on-month

Angang Steel Co., Ltd. released the 1H23 performance forecast on July 15. The company expects net profit attributable to shareholders of listed companies from January to June 2023 to be a loss of about RMB 1.35 billion, a year-on-year change in loss. The loss scale in 2Q23 will increase by about 1.05 billion yuan from 1Q23. Net profit losses may be mainly affected by continued weak supply and demand in the steel industry and poor downstream demand. Although raw material prices declined in the second quarter, they fell short of the decline in product sales prices. As a result, the company's gross profit was squeezed, and the scale of losses increased further month-on-month. We believe that leveling output on the supply side can slightly relieve the pressure on supply and demand in the industry, but the demand side may be the core variable that breaks the weak balance. Although the industry is still under some pressure in the short term, the company continues to reduce costs and upgrade products, and the Group's own iron ore also provides long-term support and guarantee for the company's operations. We maintain the “buy” rating of Angang Steel Co., Ltd., with target prices of 3.45 yuan (0.55x 23E PB) and HK$2.94 (25% off A-shares). The forecast EPS for 2023-2025 is 0.09/0.25/0.30 yuan.

Industry profits are under pressure, and demand-side improvement is the core variable

The main types of steel switched to weak reality trading in 2Q23, with average prices recovering from the first quarter. Although the average prices of coke and iron ore also fell, industry profits remained low. Since this year, steel production has been at an all-time high for the same period. Driven by continued sluggish profits, the production side passively cut production in May, but in January-May, the country's cumulative steel production still increased 1.4% year-on-year. On the demand side, according to MySteel data, the total apparent demand for the five major types of steel from January to May 2023 decreased by 4.7% compared to the average total volume for the same period in 2018-2022. With strong supply and demand weakening, the industry's supply and demand are still under pressure even though inventories remain low. We believe that potential output leveling policies are not strong enough to reverse supply and demand in the industry. Potential strength of demand-side changes driven by macroeconomic and real estate policies may be the core influencing variable of the industry's traditional peak season in the second half of this year.

Group iron ore guarantees resource supply. Potential group asset mergers and acquisitions support long-term expansion. Although facing short-term loss pressure, in the long run, the company may benefit from Angang Steel Group's iron ore resources and potential asset integration. Angang Steel Group has rich iron ore resources at home and abroad. The Anshan region of China has a beneficiation capacity of 65 million tons/year and iron concentrate production capacity of 22 million tons/year, and construction of the West Anshan iron ore with a production capacity of 10 million tons/year of iron concentrate under the iron ore cornerstone plan began construction in 2022, and the Carrara iron ore with a production capacity of 8 million tons/year overseas has a production capacity of 8 million tons/year. Also, under the trend of mergers and integration in the Chinese steel industry, Angang Steel Group may further promote potential mergers and acquisitions, and Angang Steel Co., as a platform for the group's listed companies, may benefit from asset expansion brought about by eliminating competition in the industry in the future.

Risk warning: Real estate sales are weaker than expected; production control is weaker than expected.