BAOSHAN IRON&STEEL(600019)：UNDERVALUED CORE STEEL COMPANY;GROWING STEADILY DESPITE CYCLICAL FLUCTUATIONS

Action
Despite an industry downturn in 2022, as a core steel company, Baoshan Iron & Steel (Baosteel) has shown distinct operational resilience, competitive advantages, and stable profitability. In the medium to long term, we expect the firm’s profitability to improve thanks to endogenous growth and external expansion, led by the three major growth drivers. We expect growth to remain resilient despite cyclical fluctuations. Baosteel’s valuation has fallen to historical lows due to the market’s pessimistic outlook on demand fluctuations in the industry. The firm’s low valuation and high dividends provide a high margin of safety, in our view. We expect a revaluation as the firm maintains steady profitability and its endogenous growth and M&A unlock potential.
Reasoning
Reforms improve internal indicators; solid position as a core steel company. Since the sector downturn in 2015, Baosteel has focused on improving its internal capabilities, pushing forward coordination of production bases, upgrading its product structure, and reforming management of costs. As a result, it has steadily strengthened its overall competitive advantages. Compared to sector downturns in 2008 and 2015, in the most recent downturn, Baosteel’s operational and management efficiency, asset quality, costs and expenses significantly improved. The firm increased earnings stability, expanded its competitive advantages, and cemented its position as a core steel company.
Three growth drivers create synergies; expecting greater profitability and higher market share with endogenous reforms and M&A despite cyclical fluctuations.
1. Baosteel has a strategy of developing four categories of products - high-strength steel, silicon steel, competitive products, and homogeneous products - and high-end products contained within are ramping up production. We believe that this will optimize the firm’s product structure.
2. Earnings contribution from the non-steel business - i.e., Baowu Carbon and Baosight - is rising as a result of the greater success we believe Baowu Carbon is experiencing in the low-carbon and energy-saving industries, and the digital and intelligent transformation currently occurring in the steel industry. We expect profitability of the non-steel business to improve during fluctuations in the steel sector.
3. Given the impetus for M&A, as the Baowu Group’s major listed platform, we expect Baosteel to be a major force in M&A because of its solid operational and management capabilities. Also, combined with economies of scale, we expect further improvement in its profitability and market share.
Low valuation, high dividends provide a margin of safety; expecting revaluation. The market is pessimistic about the steel industry due to demand fluctuations. Baosteel is trading at 0.6x 1H22 P/B (vs. historical bottom of 0.53x, 10% quantile) and is already undervalued, in our view. We think that pessimistic expectations have already been fully priced in. Since 2014, the firm’s dividend payout ratio has remained high, exceeding 50%. We believe the firm’s low valuation and high dividends provide a margin of safety. We expect a revaluation as Baosteel profitability has remained stable, and we believe that endogenous growth and external expansion will unlock growth potential.
Financials and valuation
We maintain our 2022 and 2023 net profit forecasts of Rmb17.27bn and Rmb20.74bn and introduce our 2024 forecast at Rmb23.77bn. The stock is trading at 6.8x, 5.7x, and 4.9x 2022e, 2023e, and 2024e P/E. Due to the market’s pessimistic outlook on demand fluctuations in the industry, we maintain OUTPERFORM but cut our TP 13% to Rmb7.39 (9.5x 2022e, 7.9x 2023e, and 6.9x 2024e P/E), offering 40% upside.
Risks
Worse-than-expected COVID-19 conditions; global economy trending downward more quickly; product structure optimization disappoints.
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   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。