3Q24 results miss our forecast

Maanshan Iron & Steel (Maanshan) announced its 3Q24 results: Revenue fell 25.8% YoY to Rmb18.51bn and attributable net profit was -Rmb1.39bn, missing our expectations as the price spread between purchases and sales of steel products narrowed sharply in 3Q24.

Sales volume and ASP of steel products fell YoY amid sluggish industry demand. Sales volume of the firm's steel products fell 15.9% YoY to 4.43mnt in 3Q24 due to weak industry demand. Sales volume of plate products, long steel products, and wheel & axle products fell 11.5%, 19.8%, and 37.5% YoY to 2.31mnt, 2.07mnt, and 50,000t. ASP of steel products declined 7.7% QoQ to Rmb3,604/t, with that of plate, long steel, and wheel & axle products down 7.7%, down 6.5%, and up 1.2% QoQ to Rmb3,758/t, Rmb252/t, and Rmb11,603/t.

Price spread between purchases and sales narrowed notably, weighing on earnings of steel business. The narrowing price spread between purchases and sales of steel products weighed on earnings in 3Q24, with gross profit and net profit per tonne falling Rmb434 and Rmb435 YoY to -Rmb189/t and -Rmb314/t.

Cost reduction and efficiency enhancement continued; expenses fell QoQ. The firm continued to reduce costs in all aspects of operation and management, and its expenses per tonne fell 4.8% QoQ to Rmb97/t in 3Q24.

Solid cash flow. The firm strengthened control over accounts receivable and inventories. Its operating cash flow stood at Rmb1,322mn in 3Q24 (vs. -Rmb1,308mn and Rmb2,535mn in 1Q24 and 2Q24) and free cash flow was Rmb1,160mn (vs. -Rmb1,884mn and Rmb2,317mn in 1Q24 and 2Q24).

Trends to watch

Awaits recovery in industry demand; pro-growth policies to help stabilize the firm's earnings. More than 40% of the firm's products are long steel products used for construction scenarios. The recovery of demand in the construction industry chain remains slow, weighing on steel demand. We believe that a turnaround in the steel industry will need support from incremental pro-growth policies. At present, policies regarding both supply and demand conditions in the real estate industry continue to be released, and physical workload of infrastructure construction has improved marginally. As such, we expect the firm's output and sales volume of steel products and its earnings to improve as demand recovers.

Product mix optimization continues; rising production and sales of new specialized steel to boost earnings recovery. The firm has continued to optimize its product mix. It developed more than 30 new specialized steel products in 1H24. The company expects sales volume of key steel products to reach 4.2mnt (20% of total products) in 2024. As the company is still at the stage of transformation towards specialized steel, we think the firm's earnings will be constrained by the ramp-up of specialized steel and efficiency enhancement in the near term. In the medium term, we anticipate that the proportion of high-end products will increase steadily, which will likely enhance the firm's core competitiveness and profitability.

Financials and valuation

Due to the sharp drop in steel prices and high raw material costs, the company's gross profit was significantly lower than we expected. We lower our 2024 net profit forecast from Rmb15mn to -Rmb2.44bn and cut our 2025 net profit forecast 39% to Rmb493mn. A-shares are trading at 0.7x 2024e and 0.7x 2025e P/B. H-shares are trading at 0.3x 2024e and 0.3x 2025e P/B. As pro-growth policies may drive the stabilization of the firm's earnings, we maintain an OUTPERFORM rating. We also maintain our TP for A-shares of Rmb3.4 (1.0x 2024e and 1.0x 2025e P/B, offering 45.3% upside) and for H-shares of HK$1.8 (0.5x 2024e and 0.5x 2025e P/B, offering 46.3% upside)

Risks

Downturn in the real estate industry; sharper-than-expected decline in steel exports.