The steel industry is operating under pressure, and the company lost money in 2023

Angang Steel Co., Ltd. achieved revenue of 113.5 billion yuan in 2023, a year-on-year decrease of 13.4%; net profit due to mother turned a year-on-year loss of -3.257 billion yuan (profit of 156 million yuan in 2022), in line with the loss of about 3.257 billion yuan in the previous performance forecast. The main loss was due to weak demand for steel for construction, and domestic steel overcapacity still exists. Steel profits are under pressure from both downstream demand and the upstream cost side. 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 maintained a “buy” rating for Angang Steel Co., Ltd., and gave a target price of 3.01 yuan (average PB valuation of 0.51x for the past 3 years, 24E BPVS 5.91 yuan) and HK$2.51 (an average discount of 25% compared to A shares in the past year). The estimated net profit for 2024-2026 is 1.15/1.73/180 million yuan, respectively.

Under the double pressure of sales price and cost, steel profits are under pressure

The company's steel production and sales volume in 2023 were 2460.05 and 24.8.549 million tons (yoy -1.93% and -3.72%), respectively. Among them, production of fist products continued to grow, automobile steel sales increased 12.2% year on year, heavy rail sales increased 14.85% year on year, and sales volume oriented to silicon steel and galvanized sheet for home appliances reached the highest level in history.

On the sales side, due to weak demand for construction steel, steel prices fell by about 10% in 2023. According to our estimates, the company's average annual steel sales price was -10%, which is basically the same as the market price drop. On the cost side, the price of coke fell by about 22% in 2023, while the price of iron ore increased slightly year-on-year. The cost of the company's products was -7.4% year-on-year, and the decline was lower than the sales price, which suppressed profits. By product, the gross margins of the hot-rolled, cold-rolled and medium-thick plate product segments were -1.34%, 1.59%, and 0.13% (yoy-3.96pct, -1.30pct, -2.05pct), respectively.

Demand recovered slowly after the steel holiday. Concerned about the availability of capital such as infrastructure, black commodity prices have generally been weak since February 2024. Among them, the construction, infrastructure and other industries resumed work slowly after the Spring Festival. According to Mysteel, as of March 28, the weekly apparent consumption of rebar was about 2.81 million tons, a year-on-year decrease of about 16%, and the apparent consumption of the five major steels was about 9.55 million tons, a year-on-year decrease of about 7%. Affected by the slow recovery in demand, steel mill inventory pressure is high. The industry has entered a stage of active production reduction and storage removal. Steel mill iron and water production declined further during the peak season, leading to a sharp drop in the prices of raw materials such as steel and iron ore. Looking ahead, we still need to pay attention to the funding situation supporting housing construction and infrastructure demand, as well as the recovery in demand for steel in the manufacturing industry. It is expected that the steel industry will continue to operate under pressure until there is no significant improvement in demand.

Risk warning: downstream demand falls short of expectations, and raw material prices fluctuate.