Reviewing the history of Nucor Steel, individual stocks had strong independent performance under the strong cycle of the industry. Reviewing the development history of Nucor Steel, there were losses from 1980 to 2009, and the rest of the time, showing strong profit stability in the strong cycle steel industry; at the same time, since August 1980, its stock price (previous reinstatement) has accumulated a cumulative increase of more than 340 times, with an annualized yield of more than 14%, significantly outperforming the S&P 500 index during the same period.
Nucor Steel's success is inseparable from excellent cost control. The cost of steel is mainly due to raw materials, depreciation, and labor costs. Nucor Steel uses a short process process, which has obvious advantages over traditional blast furnace steel companies in the above three costs.
From 1975 to 2000, against the backdrop of total US steel production peaking and continuing to decline, Nucor vigorously developed low-cost electric furnace steel, gradually seizing the share of blast furnace steel companies through cost advantages.
The cost advantage is conducive to ensuring the relative stability of profits, and can often buck the trend during periods of industry downturn. At the beginning of the 21st century, the US steel industry faced serious difficulties. A large number of US steel companies declared bankruptcy from 1997 to 2003; however, this also provided an opportunity for high-quality steel companies to develop. Nucor Steel not only maintained stable profits during the period 2000-2008, but also achieved rapid growth in steel production and sales through numerous mergers and acquisitions. The market share increased from 9.82% to 22.2% during this period.
Compared with Nucor Steel and Valin Steel, Nucor Steel's gross margin is superior to Valin Steel over a long period of time, but the gap between the two has narrowed markedly after supply-side reforms. Looking at the long-term cycle, Nuco Steel's gross margin was higher than that of Valin Steel for most of the time. In 2005-2022, Nucor Steel's average gross margin was about 14.2%, higher than Valin Steel's 9.1%, mainly due to differences in steel bargaining power due to US trade protection regulations and differences in the concentration of the steel industry between the two countries, and differences in cost control capabilities due to differences in raw material self-sufficiency rates. However, according to our analysis, Valin Steel's operating capacity improved markedly after supply-side reforms. The average gross margin in 2017-2022 was about 13.7%, which is close to the average gross margin level of Nuco Steel during the mature period.
Investment analysis opinion: Against the backdrop of declining real estate demand, China's steel industry is sluggish and companies are losing money; however, at the same time, downstream steel companies that focus on manufacturing, such as Valin Steel, Baosteel, and Nangang Steel, are still operating relatively stable, showing strong cyclical resistance. At the current juncture, compared to US steel companies such as Nucor Steel, A-share steel companies' PB and PE valuations are all relatively undervalued. Considering the rise in iron ore prices in the second half of '23, we lowered the company's net profit to 5.339 billion yuan in 2023 (the original forecast was 5.604 billion yuan). However, in the long run, we are optimistic about stable manufacturing demand and the stability of the company's long-term profit, so we kept the 2024-2025 net profit forecast unchanged at 60.03 billion yuan and 6.491 billion yuan, respectively. The corresponding PE valuations were 7 times, 6 times, and 6 times, respectively. Compared to US stocks and comparable companies in the A-share steel industry, Valin Steel's PB and PE valuations are currently low, maintaining a “buy” rating.
Risk warning: Demand from downstream manufacturing falls short of expectations, and raw material prices have risen sharply.