CICC released a research report stating that at present, the domestic manufacturing industry has maintained a positive recovery momentum. Previously, due to the decline in the real estate market, the market's demand expectations for the industry were still pessimistic. Looking ahead, the steel industry is expected to recover.
The Zhitong Finance App learned that CICC released a research report indicating that at present, the domestic manufacturing industry has maintained a positive recovery trend. Previously, due to the decline in the real estate market, market demand expectations for the industry were still pessimistic. Looking ahead, expectations in the steel industry are expected to recover, and it is difficult to falsify in the short term. Underrated leading steel companies in the manufacturing industry may face a gradual recovery in profits and valuations, and excess profits can be expected. In terms of targets, it is recommended to focus on two main lines: 1) underestimated steel “core assets” with a bottom layout, and 2) leading companies in new special steel materials.
Related targets: 1) Focus on Baosteel Co., Ltd. (600019.SH), Valin Steel (000932.SZ), and it is recommended to focus on Nangang Steel Co., Ltd. (600282.SH). 2) Focus on recommending Tiangong International (00826), a leading global tool and tool steel leader with high growth. It is recommended to focus on stainless steel pipe leaders Jiuli Special Materials (002318.SZ) and CITIC Special Steel (000708.SZ).
Recent developments in the industry: The National Bureau of Statistics released March data: the apparent consumption of crude steel in March 2024 was 793.17 million tons, -7.4% year-on-year. Crude steel production was 885.88 million tons, -4.6% YoY.
The main views of CICC are as follows:
Demand continued to diverge in March, and fundamentals bottomed out for the second time
The manufacturing and construction industries continued to differentiate in March: the area of new housing construction continued to be -25.6% to 78.54 million square meters; real estate sales area/sales reached -23.7/ -28.5% year over year to 112.99 million square meters/107.8 billion yuan. Real estate restoration fell short of market expectations.
At the same time, the manufacturing boom was strong, fixed asset investment in the manufacturing industry was +9.9% year-on-year, and downstream production such as automobiles/home appliances continued to grow. Overall, the fundamentals of 1Q24 steel are still weak. The volume and price of real estate sales are low, and the construction end has declined significantly, leading to a slump in steel demand. Market expectations remained pessimistic from the beginning of the year to late March. The overall black price declined rapidly, causing a scissor gap. The profit margin of the industry bottomed out for the second time. 1Q24Mysteel Steel's profit margin was 25.9%, falling close to the lowest level in history.
The manufacturing boom is expected to pick up, and optimistic expectations will drive core asset valuation repair
CICC stressed 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. CICC believes that when expectations for improvements in industry fundamentals are strengthened or phased improvements occur, sector valuations will have conditions for repair.
Since April, the fundamentals of the steel industry have improved marginally: demand has shown strong resilience. The year-on-year decline was 6.7ppt narrower than 1Q24. At the same time, steel companies' profits have recovered. Since the second quarter, CICC estimates that the instantly/monthly inventory production profit of rebar has increased 143/94 yuan/ton from 1Q24 to 107/128 yuan/ton, respectively.
Looking at the medium term, I am optimistic that the manufacturing industry will recover and exceed market expectations
1) Forward-looking indicators improved, and the manufacturing PMI in March was +3.5% year-on-year to 50.8, showing an expansion trend. 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 storage replenishment. The two resonate, thus driving the rise in steel prices and the restoration of steel companies' profits.
Risk warning
The real estate market declined further; the global economy accelerated its decline.