According to the report released by Haitong International on the Zhitong Finance APP, the net export volume of crude steel in 2024 Q1 is about 24.98 million tons, a net increase of 6.12 million tons, up 32.44% year on year, and the net export greatly eased the domestic production pressure. The poor profitability of domestic steel enterprises forces them to seek external exports. By using crude steel production and net exports to estimate the apparent demand for domestic crude steel, the results show a decline of about 4.73% in apparent consumption of domestic crude steel in 2024 Q1. Additionally, looking at the PB trend of the steel sector (Shenwan) over the past 24 years, the current PB valuation of the steel sector is already in the bottom range. Compared globally, the PB valuation of A-share steel companies is in the middle range, with the USA and Taiwan region of China being relatively expensive, while the valuations of European and Russian steel companies are significantly lower.

We suggest paying attention to Baoshan Iron & Steel (600019.SH), Valin Steel (000932.SZ), Nanjing Iron & Steel (600282.SH), CITIC Pacific Special Steel Group (000708.SZ), Beijing Shougang (000959.SZ), etc.

Haitong International's main viewpoints are as follows:

The decline in income in 2024 Q1 is greater than the decline in costs, and the gross margin has decreased. The income of listed steel companies falls with the decrease in steel prices. The total income of listed steel companies in Q4 2023 was RMB 509.8 billion, a decrease of 0.77% compared with Q3 2023; the income in Q1 2024 was RMB 483.6 billion, a decrease of 5.14% compared with Q4 2023; the total cost in Q1 2024 was RMB 463.3 billion, a decrease of 4.24% compared with Q4 2023. The decline in income is greater than the decline in costs, and the gross margin has decreased.

The total net profit of the steel sector's parent companies in Q1 2024 fell by 104% year on year. The decline in costs is less than the decline in income, and the gross margin has decreased. The total net profit of listed steel companies in Q3 2023 was RMB 5.206 billion, a decrease of 47.29% compared with the previous quarter. The total net profit of listed steel companies in Q1 2024 was a loss of RMB 220 million, a decrease of 104% compared with the previous quarter. The net profit of Baoshan Iron & Steel's parent company in Q4 2023 and Q1 2024 was RMB 3.594 billion and RMB 1.926 billion, respectively, both of which decreased compared with the previous quarter.

The profits of the steel sector's parent companies in Q1 2024 fell sharply by 104% year on year. The decline in costs is less than the decline in income, and the gross margin has decreased. The total net profit of listed steel companies in Q3 2023 was RMB 5.206 billion, decreasing by 47.29% compared with the previous quarter. The total net profit of listed steel companies in Q1 2024 was a loss of RMB 220 million, decreasing by 104% compared with the previous quarter. Among them, the parent company net profit of Baoshan Iron and Steel in Q4 2023 and Q1 2024 were RMB 3.594 billion and RMB 1.926 billion respectively, both of which reduced compared to the previous quarter.

The profits of the steel sector in Q2 2024 improved compared to Q1 2024.

Haitong International pointed out that if profits are calculated based on steel prices, ore prices, and coke prices on the same day, it will be found that the ton steel gross margin in Q1 2024 is relatively weak. However, steel companies often have ore and coke inventories for half a month to a month, or even longer, so the actual financial accounts of each company often differ greatly. Gross margin per ton of steel fluctuates with supply and demand. In January 2024, it rebounded from the bottom and returned to the high point of this round by the end of April, and then turned down again. According to Mysteel's survey, the profit margin of steel companies increased from 21.21% on March 15, 2024 to 52.81% on May 3, 2024. The average profit margin of steel companies in the second quarter of 2024 was significantly higher than that in the first quarter.

The financial health of the sector.

As of Q1 2024, the total liabilities of listed steel companies were RMB 1.2272 trillion, with a debt ratio of 57.37%, which has remained stable at this level for several years. The debt ratio has cumulatively decreased by about 11 percentage points from the highest point in 2016. The net cash flow from operating activities was negative for the second time in history. From 2002 to Q1 2024, cash flow was negative twice. One time was -RMB 8.2 billion in Q1 2023 and the other time was -RMB 12.5 billion in Q1 2024. Investment activities still exist. The net cash inflows from investment activities were RMB 87.2 billion, RMB 98.6 billion, and RMB 76.3 billion in 2021-2023, respectively. The proportion of expenses to income gradually decreased during the 22 years. R&D expenses were separately listed from 2018, but even so, the proportion of the three expenses including R&D to sales revenue is still at a relatively low level in the past 24 years. The fluctuation of R&D expenses and sales expenses is relatively large and has become an important factor affecting performance.

The ROE and ROA of the sector are in a relatively low level.

Haitong International believes that the asset returns in the steel sector are volatile. In Q1 2024, the overall asset returns of steel companies were below the historical average level, and special steel performed better than general steel. During the past decade, inventory management efficiency has improved, and the turnover rate has increased from approximately 6 times to around 8 times, with a downward trend in the past two years. The total asset turnover rate and net asset turnover rate have remained at the middle level.

The warning for risks: policy risks and external risks.