2Q23 Losses increased; in the short term, industry fundamentals are still under pressure Angang Steel Co., Ltd. achieved revenue of 58.82 billion yuan, a year-on-year decline of 16.3%; net profit turned to a year-on-year loss of 1.36 billion yuan (profit of 1.67 billion yuan for the same period last year); of these, the 2Q23 loss scale increased by about 1.05 billion yuan compared to 1Q23. Profit losses were mainly affected by a sharp drop in steel prices under industry adjustments due to weak expectations of improved demand. Although steel prices have bottomed out since June, driven by equalization policy expectations and marginal improvements in demand, we believe that the core driving the industry out of the bottom still lies in the continuous improvement in demand, especially the stability and recovery of the domestic real estate industry. Although the industry is still facing 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 for the company's operations. We maintain our “buy” rating for Angang Steel Co., Ltd., and maintain our target prices at 3.45 yuan (0.55x 23E BPVS 6.27 yuan) and 2.94 Hong Kong dollars (25% off A-shares).
The EPS forecast for 2023-2025 is 0.09/0.25/0.30 yuan.
Steel prices fell sharply, leading to loss of gross profit
The company's production and operation remained stable in the first half of the year. Steel production and sales volume declined slightly by 0.4% and 2% year-on-year, respectively; the steel production and sales rate was 101.31%. The overall yield of steel increased by 0.24 percentage points over the same period last year, achieving the best level in history. Among them, the yield of raw varieties of unoriented silicon steel products increased by 55.4 percentage points.
However, product prices all fell sharply due to weak demand. 1H23's average steel sales price fell 22.3% year on year. On the cost side, benefiting from the decline in overall raw material prices during the period, the company's average cost per unit of steel fell by about 17.4%, but the decline was still not as large as the price drop. As a result, gross profit per unit turned loss year over year, from profit of 281 yuan per ton in the same period last year to loss of about 29 yuan per ton, and gross margin fell from 5.2% to -0.7%.
Production leveling has brought about a slight repair. The bottom reversal is still awaiting demand improvement. We believe that the crude steel production control policy will be the core variable driving the sector's phased rebound, but judging from the current policy, although steel mills in North China have released news of production restrictions one after another, it still lacks strong restraint in terms of the scope or intensity of production cuts. The actual reduction in supply has not yet met expectations, and steel prices have only been slightly repaired. We believe that in addition to requiring strict disciplinary control of production, the industry's exit from the bottom still lies in continuous improvement on the demand side, especially the stability and recovery of the real estate industry. Although favorable macro-policies continue to be released, it will take a certain amount of time from policy direction to actual implementation impact. In the short term, it is more a restoration of market confidence than a real recovery in actual demand. It is expected that industry pressure will remain in the short term.
Risk warning: Real estate sales are weaker than expected; production control is weaker than expected.