中國(guó)鋼鐵業(yè)：歷史高位庫(kù)存應(yīng)保持全年低盈利

1、Global Research27 March 2020China Steel SectorHistorical high inventory should keep full-year profitability lowLow 2020E profitability for Chinese steel mills but this should be in the price Given slow resumption of downstream production and a high production run rate, steel inventory continues to h

2、it historical highs. Our revised 2020 China steel supply-demand (SD) model and quarterly analysis show Q220 steel profitability would be low even in our upside scenario, due to high inventory and excess capacity. However, we believe the trough valuations of most stocks have priced in poor profitabil

3、ity. We are neutral on the sector, but upgrade Angang-A/H to Buys as we view their valuations as overly low. We reiterate Sells on Maanshan-A/H, as their valuations are far from historical troughs.Factoring coronavirus impact so far into 2020E steel SDWe forecast Chinas steel demand to decline by 1.

4、6% YoY in 2020 (we previously estimated 2% growth) as: 1) UBS economists have raised their infrastructure demand growth estimate from 9% to 10% YoY; 2) our analysts have revised their property demand forecast from -2% to -3% YoY; and 3) our auto team has cut its YoY auto demand growth estimate to a

5、high single digit. We expect these to drive down the 2020 industry utilisation rate (UTR) to 83%, versus 87% in 2019. Our upside scenario property demand is flat, infrastructure is up 15% YoY and auto is down by a low single digit. In this case, both steel production and demand would increase by abo

6、ut 1% YoY with UTR at 85%. Our downside scenarioproperty demand is down by a single digit, auto is down by over 10% YoY and infrastructure is up by 5% YoY only. In this case, steel production/demand would drop by 4%/5% YoY with UTR at 80%.Our stress test shows robust balance sheets of steel companie

7、s under coverage Our stress analysis shows: even in our downside case, the highest net gearing would only be 40% in 2020 (historically Maanshan reported the sectors highest net gearing at about 90% in 2015). We believe Chinas supply-side reform has supported strong balance sheets. Before the reform,

8、 industry UTR was lower than 70%. During/after the reform, it has been above 80% and company balance sheets have been repaired.Neutral on the sector due to low valuationsOur base case factors in high inventory pressuring steel mills UTR and profitability in 2020. Baosteel, Angang-A/H and China Orien

9、tal (CO) are trading close to their historical troughs, implying low profitability is in the price. We thus are neutral on the sector. We upgrade Angang-A/H to Buys as there were times they broke below their historical lows recently. We maintain our ratings for Baosteel (Neutral) and CO (Buy), and r

10、eiterate our Sells on Maanshan-A/H given their relatively rich valuations.Figure 1: China steel sector valuationsSteelChinaEquitiesJames KanAnalyst HYPERLINK mailto:james.kan james.kan+852-2971 6334Han ZhangAnalyst HYPERLINK mailto:han.zhang han.zhang+852-2971 8674Wenzhuo DuAnalyst HYPERLINK mailto:

11、wenzhuo.du wenzhuo.du+852-3712 2545David WeiAnalyst S1460519080001 HYPERLINK mailto:david.wei david.wei+86-213-866 8842Code RatiNewngOldPrice (LC)Price targeNewt (LC) OldMkt cap US$ m P/BV 2019E(x)2020EROE 2019E(%)2020E2019E NewNPATOld2020E NewNPAT OldChina Oriental0581.HKBuyBuy2.003.064.549550.30.3

12、15.39.12,7792,7791,7771,780Angang0347.HKBuyNeutral2.113.003.022,5230.30.33.02.41,6042,8681,3631,426Maanshan0323.HKSellSell2.541.842.202,5030.60.64.02.71,1341,955799859H-share avg.0.40.47.44.8Baosteel600019.SSNeutralNeutral4.725.346.2514,6600.60.66.54.811,46712,8688,5778,695Angang000898.SZBuyNeutral2

13、.713.363.423,5850.50.53.02.41,6042,8681,3631,426Maanshan600808.SSSellSell2.582.222.282,7940.70.74.02.71,1341,955799859A-share Avg.0.60.64.53.3Note: Above data as of 26 March 2020. Unit for NPAT is Rmb m. Source: Company data, UBS estimates HYPERLINK /investmentresearch /investmentresearchThis report

14、 has been prepared by UBS Securities Asia Limited. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 18. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect

15、 the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.China Steel SectorUBS Research THESIS MAP a guide to our thinking and whats where in this reportOUR THESIS IN PICTURES MOST FAVOUREDLEAST FAVOUREDAngang-H, China Orienta

16、lMaanshan-A/HPIVOTAL QUESTIONSQ: Will China steel mills profitability improve in 2020 compared with 2019?No. We expect Chinas 2020 steel SD to deteriorate: we forecast supply/demand to decline by 1%/ 2% YoY, while steel capacity may increase by 4% YoY. Thus, the industry UTR could decline to 83% in

17、2020E, which would drag industry profitability. On quarterly profitability, compared with Q120, we expect the industry UTR to increase in Q220 but remain below the Q219 level, due to a relatively weak quarterly SD balance. We forecast the UTR to improve YoY in Q320, potentially boosting profitabilit

18、y. We estimate Q320 (strongest quarter in our 2020 forecasts) GP at Rmb400/t and about Rmb300/t for the full year. HYPERLINK l _bookmark2 moreQ: Would a potential steel industry downcycle in 2020E significantly weaken steel mills balance sheet quality?No. We expect potential weakness in profitabilit

19、y to have limited impact on balance sheet quality. Factoring in our Rmb100/t YoY industry GP decline assumption, the net gearing and EBITDA/interest expense of our covered companies in our base case remain relatively healthy (net gearing at 20-30% and CO in a net cash position; interest expense only

20、 take 3-20% of EBITDA). Even in our downside case (GP being Rmb100/t lower), the companies would maintain net gearing of 20-40% (CO in a net cash position) and high EBITDA/interest expense ratios. HYPERLINK l _bookmark3 moreUBS VIEWWe expect steel mills profitability to deteriorate this year, dragge

21、d by an industry UTR decline in 2020E. As the coronavirus outbreak has not been fully contained, we believe steel demand and profitability are unlikely to pick up significantly in Q220. Our quarterly analysis suggests Q320 could be the strongest quarter this year in terms of GP. For the full year, w

22、e expect steel supply/demand to decline by 1%/2% YoY.EVIDENCEStrong fixed asset investment (FAI) growth in the steel sector in 2019 should lead to more steel capacity being released in 2020, while the current high steel inventory may hurt UTR and profitability. UBS now expects 2020 property new star

23、ts to decline by 3% YoY (-2% previously) while our economists believe FAI into infrastructure could increase by 10% YoY. To fully destock the high inventory, even assuming Q220 steel apparent demand growth of 3% YoY, we estimate steel mills would still need to curtail production in Q2-Q420. Despite

24、the potential industry weakness, our scenario analysis shows our covered companies could maintain healthy balance sheets.WHATS PRICED IN?Most of our covered stocks are trading close to or even below their P/BV troughs in 2014/15, implying the market has priced in potential weakness in industry profi

25、tability. The companies balance sheet quality was the weakest around 2015, before Chinas supply-side reform. Thus, we believe current valuations have also taken into account investor concerns about balance sheet stress in a potential 2020 downcycle. However, even if we factor in our downside GP, ste

26、el companies gearing and EBITDA/interest expenses would remain relatively healthy (close to 2019 level) and far from the historical stress levels in 2015. We therefore think the market is overly concerned about the potential impact of industry weakness on balance sheets. HYPERLINK l _bookmark4 moreB

27、ase case steel spply-demand quarterly trajectory290270250230210190170150130Steel production (mt)Apparent demand (mt)Annualised utilisation rate (RHS)1Q192Q193Q194Q191Q20E2Q20E3Q20E4Q20E0.940.910.880.850.820.790.760.73Source: National Bureau of Statistics of China (NBS), UBS estimatesChina Steel Sect

28、orUBS ResearchPIVOTAL QUESTIONS HYPERLINK l _bookmark1 return Q: Will China steel mills profitability improve in 2020 compared with 2019?UBS VIEWNo. We expect Chinas 2020 steel SD to deteriorate: we forecast supply/demand to decline by 1%/ 2% YoY, while steel capacity may increase by 4% YoY. Thus, t

29、he industry UTR could decline to 83% in 2020E, which would drag industry profitability. On quarterly profitability, compared with Q120, we expect the industry UTR to increase in Q220 but remain below the Q219 level, due to a relatively weak quarterly SD balance. We forecast the UTR to improve YoY in

30、 Q320, suggesting steel profitability may pick up from there. We estimate Q320 (strongest quarter in our 2020 forecasts) GP at Rmb400/t and about Rmb300/t for the full year.EVIDENCEWe believe the high FAI growth in the steel sector in 2019 will be further realised in 2020, resulting in more new stee

31、l capacities. Also, the current high steel inventory level could indicate that steel demand in Q120 did not recover as much as the market expected. Regarding steel demand breakdown, UBS is now more negative about 2020 property new starts than before (down 3% YoY in 2020E), while our economists belie

32、ve FAI in infrastructure/ machinery could increase by 10% YoY. Management of leading steel companies has been negative about auto demand since the coronavirus outbreak.WHATS PRICED IN?Based on our 2020 industry outlook, full-year GP could drop by Rmb100/t YoY to Rmb300/t. Most of our covered stocks

33、are trading close to or even below their P/BV troughs in 2014/15, implying the market has priced in potential weakness in industry profitability. We thus are neutral on the China steel sector. We thus are neutral for steel sector overall. We also continue to think that consensus is: 1) underestimati

34、ng effective supply additions; and 2) overly optimistic, as we forecast industry UTR to continue to fall and the trajectory of the UTR decline suggests a larger-than-consensus GP fall.Considering the ongoing COVID-19 outbreak, we update our 2020 China steel supply-demand model (Figure 4) and conclud

35、e that:Steel industry UTR and profitability could drop further in 2020Despite the COVID-19 outbreak, we think the high 2019 FAI growth in the steel sector will continue to be realised this year, implying steel capacity may further increase by 4% YoY to about 1190mt in 2020E. Factoring in 2M20 crude

36、steel production and impact of the COVID-19 outbreak, we expect 2020 crude steel production to remain at about 990mt, slightly down 0.3% YoY. As such, we downgrade 2020E steel industry UTR to 83.5% (versus our previous forecast of 86% and 2019s actual UTR at 87%). Based on our new industry UTR forec

37、ast, we estimate steel mills GP in 2020 at about Rmb300/t (Rmb400/t in 2019). As such, as per Figure 1, we adjust our earnings estimates, PTs and ratings for steel companies under our coverage (details in the Whats Priced in? section).Steel demand could decline mildly in 2020Traders and large and me

38、dium (L&M) steel mills have seen concurrently high inventory levels (Figure 2 and 3), reaching about 50mt in recent weeks, implying slower-than-expected activity resumption by downstream industries since the COVID-19 outbreak, which is likely to cause further pressure on steel demand in the rest of

39、2020. We thus revisit our estimated steel demand breakdown:We are now more negative about demand from property: the UBS property team expects new starts to drop by 3% YoY in 2020 (versus its previous estimate of -2%);Demand from infrastructure should continue to increase YoY in 2020: UBS economists

40、expect FAI into infrastructure to grow by 10% YoY;We expect a decline in auto demand: 2M20 passenger vehicle sales volume dropped sharply by over 40% YoY; based on our discussions with the UBS auto team and the electric vehicle (EV) supply chain, we forecast China auto demand to drop by a high singl

41、e digit YoY in 2020.Considering these mixed factors, we expect China steel demand to recover during Q2-Q320, but full-year demand to decrease by about 2% YoY.Figure 2: Steel inventory at tradersFigure 3: Steel inventory at L&M steel mills2016201720182019 Historical average2020mtmt2623242122201918171

42、614151213101186920162017201820192020Historical average (2016-19)Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov DecJan Feb Mar Apr May Jun Jul Aug Sep Oct Nov DecSource: MysteelSource: MysteelFigure 4: Summary of our China steel supply-demand (SD) model(mt)201520162017201820192020E2021E2022E2023EEffecti

43、ve crude steel capacity1,2001,0009701,0501,1441,1901,2081,2151,223% YoY3.4%-16.7%-3.0%8.2%8.9%4.0%1.5%0.6%0.6%Crude steel production8047878329289969841,0011,0061,006% YoY-2.2%-2.1%5.8%11.5%7.3%-1.3%1.8%0.5%0.0% Utilisation67.0%78.7%85.8%88.4%87.1%82.7%82.9%82.8%82.3%Blast furnace capacity (implied)8

44、579191,0001,0301,0401,0401,040- BF utilisation83%84%81%79.6%79.6%79.0%78.0%Pig iron production691701711771809820828822811% YoY-3.1%1.3%1.4%8.5%5.0%1.3%1.0%-0.8%-1.3%EAF capacity (estimated)113131144160167175182- EAF utilisation rate65%68%69%54%58%62%65%EAF production7389998697108119Implied BOF scrap

45、-based output6991110101100100100BOF scrap ratio10%12%14%12%12%12%12%Scrap supply needed150189219197207219229Modelled scrap supply164220240204221224234Net export - crude steel10610165595252565959% YoY25.6%-4.4%-35.3%-10.2%-10.9%0.0%6.5%5.9%-0.6%Export12011580746868727575% YoY19.7%-3.5%-30.6%-7.8%-7.2

46、%0%5%5%0%Import141415151616161617% YoY-11.9%3.3%2.3%2.9%7.2%0%0%2%2%Total effective supply - crude steel698686767870944931945947948% YoY-5.4%-1.8%11.8%13.4%8.6%-1.3%1.5%0.2%0.0%Total crude steel demand699687768870946932945947948% YoY-5.5%-1.8%11.9%13.2%8.8%-1.6%1.5%0.2%0.0%PropertyTotal crude steel

47、consumption213209234275315305299290282% YoY-13.2%-1.8%11.9%17.2%14.7%-3%-2%-3%-3%As % of total30.5%30.5%30.5%31.6%33.3%32.8%31.7%30.7%29.7%InfrastructureTotal crude steel consumption197203229234242266278283291% YoY3.5%2.9%12.8%2.0%3.8%10%5%2%3%As % of total28.2%29.6%29.8%26.9%25.6%29%29%30%31%Machin

48、eryTotal crude steel consumption106123144157162162165170176% YoY-23.0%15.5%17.0%9.5%3.1%0.0%2.0%3.0%3.0%As % of total15.2%17.9%18.7%18.1%17.1%17%17%18%19%AutoTotal crude steel consumption566161595450535454% YoY2.9%9.3%0.1%-4.1%-7.5%-8.0%6.7%1.7%-0.3%As % of total8.0%8.9%8.0%6.8%5.7%5.4%5.6%5.7%5.7%E

49、nergyTotal crude steel consumption252627293030313334% YoY1.1%1.6%4.5%6.7%5.0%0%3%5%5%As % of total3.6%3.7%3.5%3.3%3.2%ShipbuildingTotal crude steel consumption171515131414141414% YoY-4.1%-8.6%-1.9%-10.9%6.2%-0.3%-0.3%-0.3%-0.3%As % of total2.4%2.2%1.9%1.5%1.5%1.5%1.5%1.5%1.5%Home applianceTotal crud

50、e steel consumption141213141414141515% YoY5.0%-16.5%8.6%8.7%0.6%0.0%2.7%2.7%2.0%As % of total2.0%1.7%1.7%1.6%1.5%1.5%1.5%1.5%1.6%OthersTotal crude steel consumption9663469011490908883% YoY18.6%-33.8%-27.9%96.2%27.5%-21.3%-0.3%-1.9%-6.2%As % of total14%9%6%10%12%10%9%9%9%Source: WIND, Sxcoal, Mysteel

51、, company data, UBS estimatesQ320E the strongest quarter and industry 2020E GP down to Rmb300/tFrom the current high steel product inventory in the system and a continuously high steel production run rate, we gauge quarterly apparent demand, steel production run rates, and how high inventory may be

52、brought down to a normal level in Figure 6 and Figure 7.Our considerations:We forecast about 3% growth for Q220 and Q320 apparent steel demand in China. As we believe Q120 apparent demand could drop 13% YoY, we estimate 3% YoY growth in Q220 and Q320 would be adequate for inventory to normalise. App

53、arent demand growth of 3% YoY assumes property new starts, auto production, machinery production, etc (about 75% of steel demand) recover to flat YoY starting Q220, and demand from infrastructure accelerates to 20% YoY growth from Q220.The apparent steel demand trajectory implies a slow decline in s

54、teel inventory in China. We assume a 15mt decline in Q220 and a further 8mt in Q320. With these, inventory should return to a normal level (sub-20mt) in Q420. In the previous two years, total inventory reduction between Q2 and Q4 was about 10-12mt. We believe our inventory assumptions are already ag

55、gressive considering the current market amid the COVID-19 outbreak.As such, we estimate China steel production YoY to be hovering between -2% and 1% over Q2-Q420. More aggressive production curtailment would help bring down inventory in the system more significantly. However, we have not seen aggres

56、sive production curtailment in March amid low profitability for steel mills.With our estimated production run rates, we believe industry UTR could reach about 87% in Q320. Benchmarking previous quarters, this indicates roughly Rmb400/t GP. For the full year, we estimate the UTR to be about 83% in 20

57、20, implying an average GP of Rmb300/t or slightly lower. This is how we justify our full-year earnings projections for China steel mills.Our upside/downside scenarios and implied steel mill profitability are shown in Figure 17.Figure 5: Base case assumptionsMajor demand driver (YoY)UBS estimated %

58、of 2019 total demand20192020E base caseProperty33-35%9.2%-3%Infrastructure27-30%3.8%10%Machinery17-19%3.1%0%Auto6-8%-7.5%-8%(mt)20192020E base caseChina crude steel production996984YoY7.3%-1.3%China pig iron production809820YoY5.0%1.4%China apparent steel demand946932YoY8.8%-1.5%Estimated full-year

59、utilisation for steel industryc.87%c.83%Estimated full-year GP/t (Rmb/t)c.400c300Best-quarter apparent demand YoY12%3%Best-quarter utilisation ratec.90%c. 87%Best-quarter GP (Rmb/t)c.500c.400Source: UBS estimatesFigure 6: Base case steel SD summaryFigure 7: Base case steel inventory quarterly drawdo

60、wn29027025023021019017015050.035.027.627.022.721.719.317.217.21300.9453Steel production (mt) Apparent demand (mt)Annualised utilisation rate (RHS)0.91480.8843 380.85330.82280.79230.76180.7313Quarter end Inventory balance (mt)1Q19 2Q19 3Q19 4Q19 1Q20E 2Q20E 3Q20E 4Q20E4Q181Q192Q193Q194Q19 1Q20E 2Q20E