Angang Steel - 2Q23 net losses widening on lower steel product margins; awaiting materialization of industry policies to support outlook
- 2Q23 revenue fell 20.9% y-o-y to RMB27,981m due to lower steel product prices
- Decline in steel product margins led to net losses of RMB1,197m, in line with preliminary results alert
- Trimmed FY23F/FY24F earnings forecast but still expect Angang to deliver turnaround to profit from 4Q onwards
- Awaiting materialisation of policy catalysts; lower TP to HK$2.2 (from HK$2.9) on -1SD of historical mean of 0.3x P/B, maintain HOLD
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2Q23 revenue fell 20.9% y-o-y to RMB27,981m due to lower steel product selling prices. Gross profit-level losses of RMB881m were reported in the quarter due to a slower decline in cost than increases in selling prices. The gross profit margin turned negative from the last quarter. As a result, Angang reported a net loss of RMB1,197m in 2Q, which was widened from that of the last quarter and was in contrast to the profit reported a year ago. The results were largely in line with the preliminary results alert.
Gross borrowings amounted to RMB4,672m as of end-Jun 2023, rising 88.5% from end-Dec 2022’s RMB2,478m. Despite this, the net gearing ratio was merely at >2% for the period, versus a net cash position as of Dec 2022.
Outlook
We are aware that the market is expecting the China steel industry’s output to be lower than that of last year. In other words, that would represent a h-o-h output decline versus of a 2.5% YTD crude steel output growth during the first seven months of 2023. This is not a new practice, and has been seen in recent years, especially when industry earnings were fragile. Hence, we reckon it could provide support for a rebound in steel prices and margins going forward.
Meanwhile, based on the spot market price of steel products and the major input cost of energy and ore materials, Chinese steel product gross margins have largely fluctuated at the breakeven level. The inventory levels for both steel products and iron ore have remained steady at year-low levels. It could add further downward pressure once the industry supply shrinks further, in our view.
We have trimmed our FY23F/FY24F earnings forecasts assuming Angang’s steel products would maintain gross profit breakeven over these two years. Meanwhile, we foresee Angang delivering a turnaround in 2H23. After all, we have lowered our TP to HK$2.2 (from HK$2.7) on a target of 0.3x P/BV, based on -1SD of the historical mean; recommend HOLD.
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| FY Dec | 3Q2019 | 2Q2020 | 3Q2020 | % chg yoy | % chg qoq |
|---|---|---|---|---|---|
| Revenue | 35,796 | 35,367 | 30,556 | (14.6) | (13.6) |
| Cost of Goods Sold | (31,944) | (34,220) | (31,756) | (0.6) | (7.2) |
| Gross Profit | 3,852 | 1,147 | (1,200) | nm | nm |
| Other Oper. (Exp)/Inc | (776) | (822) | (727) | (6.3) | (11.6) |
| Operating Profit | 3,076 | 325 | (1,927) | (162.6) | (692.9) |
| Other Non Opg (Exp)/Inc | (61.0) | 16.0 | (146) | (139.3) | (1,012.5) |
| Associates & JV Inc | 108 | 60.0 | 96.0 | (11.1) | 60.0 |
| Net Interest (Exp)/Inc | (115) | (183) | (166) | (44.3) | 9.3 |
| Exceptional Gain/(Loss) | 0.00 | 0.00 | 0.00 | nm | |
| Pre-tax Profit | 3,008 | 218 | (2,143) | nm | nm |
| Tax | (674) | 25.0 | 626 | (192.9) | 2,404.0 |
| Minority Interest | (7.00) | (9.00) | (6.00) | 14.3 | (33.3) |
| Net Profit | 2,327 | 234 | (1,523) | nm | (750.9) |
| Net profit bef Except. | 2,327 | 234 | (1,523) | nm | (750.9) |
| EBITDA | 4,377 | 1,378 | (1,120) | nm | nm |
| Margins | |||||
| Gross Margins (%) | 10.8 | 3.2 | (3.9) | ||
| Opg Profit Margins (%) | 8.6 | 0.9 | (6.3) | ||
| Net Profit Margins (%) | 6.5 | 0.7 | (5.0) |
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