In the first half of 2024, the profit situation of metal companies improved significantly compared to 2023, but as prices of major metals soared and fell in 24Q2, the metal sector showed a marked correction.
The Zhitong Finance App learned that CITIC Securities released a research report saying that in the first half of 2024, the profit situation of metal companies improved significantly compared to 2023, but as prices of major metals soared and fell in 24Q2, the metal sector clearly recovered. In terms of segment segments, copper, aluminum and gold continued to perform well. Against the backdrop of increasing corporate profits, industry valuations have declined further. In particular, the valuation advantage of the aluminum-copper-lithium sector is prominent. Furthermore, the level of industry dividends also increased significantly in the first half of 2024. Looking ahead to the future market, we continue to be optimistic about the allocation value of gold under interest rate cut deals. Industrial metals are expected to benefit from a moderate rise in prices brought about by a recovery in demand. The bottom of the lithium and rare earth sectors has remarkable characteristics, and may have a comparative advantage during the period of market style changes. It is also recommended to focus on consumer electronics-related material targets.
Market review: The metal sector market continues to diverge, and the trend has weakened since 24Q2.
Since the beginning of 2024, the CITIC Nonferrous Metals Index has fallen 1.6%, outperforming the Shanghai and Shenzhen 300 Index by 0.3 pcts; since the second quarter (as of August 30, same below), the CITIC Nonferrous Metals Index has fallen 11.8%, outperforming the Shanghai and Shenzhen 300 Index by 4.2 pcts. Since the beginning of 2024, the metal sector has ranked 7th in the industry in terms of gains and losses, and has slipped to 12th place since the second quarter. In terms of segment segments, gold and other rare metals have risen 28.6%/12.7% respectively since 2024, while the copper and aluminum sector has risen 3.8%/1.5%, respectively. The performance of the lithium and rare earth magnetic materials indices was weak, falling 38.4%/20.0% respectively, and the differentiation trend between various segments continued since 2023. Since 24Q2, there has been a correction in all segments of the metal industry. Among them, the gold, other rare metals, and aluminum sectors have adjusted relatively little.
Performance and valuation analysis: Profits in the metal industry have improved significantly, and the copper, aluminum, and lithium sector is undervalued.
In the first half of 2024, the overall revenue of the non-ferrous metals industry increased 2.5% year on year, and net profit to mother decreased 0.7% year on year. The overall revenue and net profit of the 24Q2 sector increased 8.0%/29.6% year on year, +19.0%/58.7% month on month, and the 24Q2 metals industry's profit picked up at an accelerated pace. In terms of segment segments, the copper, aluminum and gold sector showed outstanding performance. 24H1 net profit to mother increased by 52.5%/45.4%/45.0% year-on-year, respectively, and increased 74.5%/81.5%/38.4% month-on-month in 24Q2. Benefiting from rising or narrowing metal prices, profits in all segments of the 24Q2 metal segment showed a month-on-month improvement trend. In the year-on-year data, only lithium and rare earth sectors showed a decline. As of August 30, 2024, the non-ferrous metals sector's price-earnings ratio (TTM) was 15.8 times, and the net market ratio was 1.9 times, all significantly lower than the historical average of 26.8 times/4.3 times over the past five years. The valuation of aluminum and copper PE in the segment is low. The predicted PE in 2024 is only 9.3/12.9 times; the PB valuation in the lithium and aluminum sector is low, and the predicted PB in 2024 is only 1.2/1.4 times.
Analysis of holdings and dividends: The fund continues to increase its industrial metals holdings, and the industry's mid-term dividend has improved markedly.
As of the end of the second quarter of 2024, the market value of non-ferrous metals industry fund holdings was 142.1 billion yuan, ranking 5th among the 30 industries in the market; the market value of holdings accounted for 5.3% of the market value of fund stock investment, which was basically the same as at the end of the first quarter of 2024. By sector, the share of holdings in the industrial metals/precious metals/rare metals sector was 3.0%/0.9%, respectively. The trend of increasing industrial metals was remarkable. Excluding the adjusted composition of the precious metals sector, the share of rare metals also increased, and rare metals were reduced. In 2024, a total of 22 listed companies (proposed) implemented mid-term dividends in the non-ferrous metals industry. The total number of (proposed) implemented dividends reached 7.26 billion yuan, an increase of more than 140% over the previous year, and the average dividend ratio in the metals industry reached 10.3%, +6.1 pcts year on year.
Metals industry outlook: It is expected that the dominant macroeconomic characteristics will continue, focusing on the recovery in demand and bottom types.
CITIC Securities expects that in the context of overall weakening fundamentals, macroeconomic factors such as interest rate cut transactions will continue to dominate the metals market. There is a high degree of certainty that the price of precious metals will rise, and the allocation logic of gold is still smooth. Industrial metals, on the other hand, depend on rising demand and falling inventories to drive up prices moderately, while the long-term outlook for the supply-demand balance sheet still points to shortages. Lithium and rare earths currently have strong bottom characteristics, and may be relatively dominant during the market style change period.
Risk Factors:
Risk of a sharp drop in metal prices; risk of domestic economic recovery falling short of expectations; risk of overseas economic recession; risk of interest rate cuts falling short of expectations; risk of upstream supply growth exceeding expectations; risk of enterprises operating overseas assets; risk of enterprises not progressing as expected in building new production capacity; risk caused by changes in industry policies exceeding expectations; risk of severe safety supervision and environmental protection situations exceeding expectations.
Investment Strategy:
In the first half of 2024, the profit situation of the metal sector improved significantly compared to 2023. The profit improvement of 24Q2 enterprises was even more prominent, but as the prices of major metals soared and fell in 24Q2, the metal sector showed a marked correction. In terms of segment segments, copper, aluminum and gold continued to perform well. Against the backdrop of increasing corporate profits, industry valuations have declined further. In particular, the valuation advantage of the aluminum-copper-lithium sector is prominent. Furthermore, the level of industry dividends also increased significantly in the first half of 2024. Looking ahead to the future market, CITIC Securities continues to be optimistic about the allocation value of gold under interest rate cut transactions, while industrial metals are expected to benefit from a moderate rise in prices brought about by a recovery in demand. The bottom of the lithium and rare earth sectors has remarkable characteristics, and may have a comparative advantage during the period of market style changes. It is also recommended to focus on consumer electronics-related material targets.