The Zhitong Finance App learned that Haitong International released a research report saying that the net export volume equivalent to crude steel in 2024Q1 was about 24.98 million tons, a net increase of 6.12 million tons over the previous year, and a year-on-year growth rate of 32.44%. Net exports greatly absorbed the pressure on domestic production capacity. Domestic steel companies have poor profits, forcing steel companies to seek foreign exports. Domestic crude steel demand was estimated using crude steel production and net exports. The results showed that domestic crude steel consumption fell by about 4.73% in 2024Q1. Furthermore, judging from the PB trend in the steel sector (Shenwan) over the past 24 years, PB valuations in the steel sector are currently in the bottom region; in global comparisons, A-share steel companies' PB valuations are in the middle. The more expensive ones are the US and Taiwan, and European and Russian steel companies have significantly lower valuations.

Recommended attention: Baosteel Co., Ltd. (600019.SH), Valin Steel (000932.SZ), Nangang Steel (600282.SH), CITIC Special Steel (000708.SZ), Shougang (000959.SZ), etc.

Haitong International's main views are as follows:

2024Q1 revenue decline was greater than cost reduction, and gross margin decreased

The revenue of listed steel companies declined as steel prices fell. The total revenue of 2023Q4 listed steel companies was 509.8 billion yuan, down 0.77% from 2023Q3; 2024Q1 revenue was 483.6 billion yuan, down 5.14% from 2023Q4; and the total cost of 2024Q1 listed steel companies was 463.3 billion yuan, down 4.24% from 2023Q4. The decline in revenue was greater than the reduction in costs, and gross margin declined.

The total net profit of the steel sector fell 104% in 2024Q1. The 2024Q1 cost decline was less than the revenue decline, and gross margin declined. The total net profit for 2023Q4 was 5.206 billion yuan, down 47.29% from the previous month. The total net profit of listed steel companies in 2024Q1 was -220 million yuan, down 104% from the previous month. Among them, Baosteel's 2023Q4 and 2024Q1 net profit was 3,594 billion yuan and 1.926 billion yuan respectively, which also declined from month to month.

2024Q2 steel sector profits improved month-on-month

Haitong International pointed out that if current steel prices, mineral prices, and coking coal prices are used to calculate profits, it will be found that the gross profit of 2024 tons of steel is relatively weak. However, steel companies often have stocks of ore and coking coal for half a month to a month or more, so there is often a big difference in actual financial accounting; gross profit per ton of steel fluctuates continuously with supply and demand. It bottomed out in January 2024 and returned to this high point at the end of April, then turned downward; the profit margin of steel companies surveyed by Mysteel climbed from 21.21% on March 15, 2024 to 52.81% on May 3. The average profit margin of steel companies in the second quarter was significantly higher than in the first quarter.

Financial health of the sector

As of 2024Q1, the total debt of listed steel companies was 1227.2 billion yuan, with a debt ratio of 57.37%. It has stabilized at this level for several years. The debt ratio has dropped by a cumulative total of about 11 percentage points from the highest point in 2016; for the second time in the history of net cash flow from operating activities, it was negative. From 2002 to 2024Q1, there were two negative cash flows. Once, Q1 of 2023 was -8.2 billion yuan, and the second time was 2024Q1 operating cash flow of -12.5 billion yuan. There is still quite a bit of investment activity. From 2021 to 2023, net cash flows from investment activities were 87.2 billion yuan, 98.6 billion yuan, and 76.3 billion yuan respectively; over the past 22 years, the ratio of expenses to revenue gradually declined over the past 22 years. R&D expenses began to be listed separately in 2018. Even so, when considering R&D, the ratio of the three expenses to sales revenue was at a low level in the past 24 years. R&D expenses and sales expenses fluctuate greatly, which is an important factor affecting performance.

Sector ROE and ROA are at a low level

Haitong International believes that asset returns in the steel sector have fluctuated greatly. Overall, 2024Q1 steel companies are below the historical average, and special steel is better than ordinary steel. In the past ten years, inventory management efficiency has improved, and the turnover ratio has increased from about 6 times to around 8 times. There has been a downward trend in the last two years; the total asset turnover ratio and net asset turnover ratio have basically remained at the midstream level.

Risk warning: policy risk, external risk, etc.