The Zhitong Finance App learned that CICC released a research report that focuses on the undervalued core assets of the steel manufacturing industry. At present, the bank believes that the market's expectations for the steel industry are still pessimistic, and the sector is still in a “three low” pattern of low inventory/low profit/undervaluation. The bank sees that the domestic manufacturing Kitchin cycle has bottomed out and stabilized, and the economy is expected to improve. The bank believes that demand in the industry will continue to be divided in 24, the manufacturing industry is better than the construction industry, and the underrated leading steel companies in the manufacturing industry are expected to gradually recover their profits and valuations, and excess profits can be expected.

On the target side, it is recommended to focus on three main lines: 1) The bank emphasizes that differentiation is a future industry trend: First, demand in the manufacturing and construction industries will diverge, and there is still plenty of space for steel in the manufacturing industry. Second, the “core assets” of the manufacturing industry, which are highly competitive and have excellent profitability, have further expanded production capacity and competitive advantage as the industry gradually clears up. 2) Leading companies in new special steel materials, especially segmented track leaders that benefit from the recovery of the manufacturing industry and the certainty of growth. 3) The bank believes that iron ore supply and demand were still tight in '24. Combined with the Federal Reserve's interest rate cuts, iron ore prices are easy to rise and difficult to fall.

CICC's views are as follows:

Demand continues to diverge, and the performance of core assets in the manufacturing industry may exceed expectations.

According to the “Steady Steel Growth Plan”, the bank expects the industry's output pressure to drop or weaken in 24, and the supply of crude steel will rise slightly by 1% throughout the year. Market risk appetite has not improved under liquidity easing, and the currency multiplier effect is weak. Driven by the real estate boom, the bank expects domestic steel demand to rise slightly by 1.3% in '24, with demand in the construction industry -0.3% year-on-year and +2.6% in the manufacturing industry, continuing the pattern of differentiation. At the same time, the bank sees that the supply and demand pattern for coking coal in furnace iron ore is still tight, and the overall profit cycle of the industry has been repaired or sluggish in 24 years. Furthermore, the bank has observed that the manufacturing Kitchin cycle is bottoming out, which indicates an upward trend in the investment cycle. The bank believes that the sector's leading profits, with steel used in the manufacturing industry as its core product, are expected to usher in a steady recovery, and now is a good opportunity for core asset layout.

The industry may experience a new cycle of capital expenditure contraction, and the Matthew effect of leading companies in the medium term may be further highlighted.

The bank believes that the steel production capacity cycle can be divided into three stages: 1) demand is slowing down, industry operating indicators are clearly weakening, and the growth rate of industry capital expenditure has drastically slowed; 2) supply-side reforms have borne fruit, operating indicators have bottomed out, and capital expenditure continues to decline; 3) the industry has fully cleared up, supply and demand have tightened, operating indicators have begun to improve, and capital expenditure gradually stabilizes and rectifies as supply and demand improves. The bank believes that the steel industry is currently still in the first stage of the production capacity cycle. Looking at the medium term, the bank believes that with the contraction of industry supply and the clearance and consolidation of production capacity, the market share of leading companies will expand further, and the Matthew effect is expected to be highlighted.

Risk warning: The recovery of the real estate boom falls short of expectations, and the global economy is declining at an accelerated pace.