Hanoi Iron and Steel (HSV) – Construction steel demand is forecast to recover soon. Vietnam's public investment disbursement will accelerate from the end of 2022 after the medium-term public investment plan 2021-2025 completes the procedural approval stage...
The negative information has been completely reflected in the price, causing steel group stocks to be at a low level compared to the past. Valuation is cheap with forecast PE of some large enterprises only at 3.0x - 5.5x. Meanwhile, more positive information is appearing, which hopes this is a good time to accumulate steel stocks for 2023-2024.
BAD NEWS IS ENOUGH DISCOUNTED INTO THE PRICE?
A sharp decline in consumption demand is the biggest risk for the steel industry. Steel consumption has decreased sharply since March 2022, causing total consumption in the first 6 months of the year to decrease by 7.3%, with the sharpest decrease in the hot-rolled/cold-rolled steel coil product group, respectively down 22.2% due to the decline in demand of two downstream product groups: galvanized steel (-7.9%), and steel pipes (-8.4%). Construction steel is the only group that still recorded positive growth in the first 6 months of the year with an increase of 6.1%.
Consumption output decreased in both domestic and export markets -9.0% and -2.2%, respectively, due to the domestic real estate market slowing down after the management agency's move to strictly control capital flows into this field, and steel demand in export markets decreased due to China's Zerocovid policy and the Russia-Ukraine war.
The sharp drop in selling prices has caused the profits of steel industry businesses to fall sharply. Steel manufacturing companies have announced a sharp decrease in net profit growth in the second quarter of 2022 by 67%, pulling net profit growth in the entire market down by 8.6%. Particularly, giant Hoa Phat (HPG) recorded a net profit decrease of nearly 60% in the second quarter, in line with the forecast that Chairman Tran Dinh Long told shareholders in the first quarter about the gloomy outlook of this business in the next one or two quarters.
Steel consumption in the third quarter is still assessed at a low level because the third quarter is the rainy season and low construction season, leading to low demand for the steel industry. Besides, production activities at steel factories are moderate due to large inventories. The large amount of inventory in the context of continuously falling steel prices will cause cost prices to stay high in Q3/2022.
In the market, steel group stocks have fallen sharply over the past time, in addition to the poor outlook for the industry and also due to the general adjustment cycle of the stock market. Most steel industry stocks have been deeply discounted with a decline of about 50% from the peak.
According to BSC's assessment, the valuation of many businesses has dropped to a low level compared to the past. Although the industry's business outlook is generally difficult in 2022, current valuations are attractive for some leading stocks in the industry, and have future capacity growth prospects and are suitable for cumulative buying such as HPG and NKG.
IS IT A GOOD TIME TO ACCUMULATE STEEL STOCKS?
Steel industry stock prices adjusted downward before steel prices declined, which implies that the market always reacts to industry prospects. Therefore, when the negative information is almost gone, there are many reasons to expect this is a golden time to accumulate steel industry stocks.
Firstly, according to BSC's assessment, the consumption situation will be more positive in Q4/2022 thanks to (1) construction activities usually boost in the last quarter of the year and (2) construction costs decrease because steel prices have dropped sharply.
Second, the price of input materials has dropped sharply, providing great support for steel businesses in the second half of 2022. Prices of iron ore, coking coal and scrap steel have dropped sharply, -28%, -53% and -45% respectively since the peak. HRC prices (input materials for the galvanized steel industry) have also dropped sharply, -35% since the peak. Because the steel industry's inventory turnover is usually 2-3 months, production costs will decrease relatively, helping the profit margins of businesses in the industry improve in Q4/2022.
Meanwhile, according to Rong Viet Securities' assessment, construction steel demand will soon recover. Vietnam's public investment disbursement will accelerate from the end of 2022 after the medium-term public investment plan 2021-2025 completes the procedural approval stage.
Worldsteel forecasts that policies to encourage infrastructure investment of ASEAN 5 countries will strengthen the recovery of construction steel demand in this region, with an increase of 4.8% in 2022 and 6.1% in 2023, higher than the corresponding increases in world steel demand of 0.4% in 2022 and 2.2% in 2023.
On the other hand, according to Agriseco analysts, world steel prices show signs of recovery while coke raw material prices decrease. Spot prices for two products HRC and rebar in China have increased by over 7.5% and 10.5% since the end of July. Steel prices increased as demand for storage increased and some steel factories in China are showing signs of gradually restoring production activities after a long time.
It is expected that domestic steel selling prices will reflect this recovery momentum in the near future, along with the rapid decline in coking coal prices from the second quarter will help improve the business's revenue and profit margin in the second half of this year. In the longer term, China's suspension of the Zero Covid policy extension will not only prolong the recovery of steel prices but also help improve global steel demand, thereby shortening the industry's downward cycle.