The Zhitong Finance App learned that CICC released a research report saying that the current manufacturing industry outlook indicators have improved. Looking ahead, demand expectations are expected to be repaired, and it is difficult to falsify in the short term. Leading steel companies in the underestimated manufacturing industry may usher in a gradual recovery in profits and valuations, and excess profits can be expected. In terms of targets, it is recommended to focus on three main lines: 1) Underestimated steel “core assets” with a bottom layout, focusing on Baosteel shares. It is recommended to focus on Nangang Steel (600282.SH) and Valin Steel (000932.SZ). 2) Leading companies in new special steel materials, focus on recommending Tiangong International (00826), a leading global tool and tool steel leader with high growth, and recommend focusing on stainless steel tube leaders Jiuli Special Materials (002318.SZ), and CITIC Special Steel (000708.SZ). 3) Currently, iron ore supply and demand are still tight. Combined with expectations of interest rate cuts from the Federal Reserve, iron ore prices rise and fall easily. It is recommended to focus on Hegang Resources (000923.SZ), which has high-quality iron ore resources.

Fundamentals bottomed out for the second time, and the 1Q industry returned to the bottom of expectations and reality

The fundamentals of 1Q24 steel showed a weak trend. The volume and price of real estate sales were sluggish, and there was a marked decline at the construction end; physical infrastructure workload was slow to be implemented, and weak demand in the construction chain dragged down steel demand. Industry expectations are pessimistic, and maintenance is generally arranged to cut production, causing the industrial chain to fall into negative feedback. Overall black prices declined rapidly in 1Q, reflecting pessimistic market expectations. Furthermore, the decline in prices in the industrial chain has caused a scissor gap, exacerbating the contraction of profits. Industry profits bottomed out for the second time. 1Q24Mysteel Steel's profit margin was 25.9% 1, falling close to the lowest level in history. The industry is back to the bottom of expectations and reality.

Since 2Q24, the industry has basically improved marginally, and expectations drive core asset valuation restoration

CICC believes that stock price trends are not entirely dependent on actual demand; changes in expectations and differences between actual developments and expectations are also sources of the sector's excess earnings. When expectations for improvements in industry fundamentals are strengthened or phased improvements occur, sector valuations are in place to repair them. Since April, the fundamentals of the steel industry have improved marginally: demand has shown strong resilience. At the same time, steel companies' profits have recovered, industry supply has rebounded, and industrial chain prices have picked up.

In the medium term, I am optimistic that the manufacturing boom will recover beyond market expectations: 1) Forward-looking indicators have improved. The manufacturing PMI in April was +2.44% YoY to 50.4, which is at a historically high level. CICC has observed that orders for leading steel varieties such as tool steel and cutting tools have also been repaired. 2) Steel exports are growing strongly. In March, China's steel exports were +37.9% month-on-month to 9.888 million tons. 3) Domestic equipment upgrading and consumer goods trade-in policies are progressing steadily and are expected to further support the demand for steel in the manufacturing industry in the medium term. 4) Steel inventories have entered the active storage cycle since the Spring Festival. Currently, inventories have fallen to a lower level, and the buffer between supply and demand is thinner. If subsequent steel demand recovers or recovery expectations continue to strengthen, the inventory cycle is likely to enter passive storage removal or active inventory replenishment. The two resonate, thus driving the rise in steel prices and the restoration of steel companies' profits.

Risk factors: Real estate sentiment declined further; global economic decline accelerated; the Federal Reserve raised interest rates beyond expectations.