20160622-三星证券-Steel_Nonferrous_Metals__Trade_small_cycles_as_valuations_limit_downside_33页_1mb

Sector Update Summary: Steel/Nonferrous Metals (NEUTRAL)

Core Content

This report provides an analysis of the global steel industry, with a particular focus on the Chinese market and its implications for Korean steelmakers. The outlook is cautious, with a neutral stance due to limited downside potential in the short term and a lack of structural demand recovery.

Main Points

• Steel Demand Outlook:

  • China remains the largest source of global steel demand, accounting for 50% of it.
  • Despite recent property price hikes and infrastructure investment growth, these are viewed as short-term blips rather than long-term trends.
  • The construction sector accounts for over 60% of China's steel demand, but the shift toward a consumer-driven economy and slowing growth suggest that demand will not recover structurally in the near term.
  • A country to replace China's falling demand is not evident, and the global macro environment remains unstable.

• China's Restructuring Efforts:

  • The Chinese government has announced plans to reduce steel capacity by 100-150mtpa over the next five years and establish a CNY100b fund to support laid-off workers.
  • Restructuring is expected to dominate the industry in the second half of 2016, but the process is likely to be gradual and modest.
  • Current restructuring efforts are driven more by the government than by market forces, and there are concerns about inefficiencies, lack of coordination, and insufficient funding to support workers.

• Challenges in Restructuring:

  • Massive layoffs are expected as part of the restructuring, but the CNY100b fund may not be enough to support 1.8 million workers.
  • High debt levels among steelmakers could lead to increased non-performing loans (NPLs) if restructuring is not managed carefully.
  • The restructuring process is expected to take time, with detailed regional targets yet to be finalized and a focus on improving efficiency through labor reallocation and tighter credit controls.

• Korean Steelmakers' Outlook:

  • Korean large steelmakers (Posco and Hyundai Steel) are viewed as having better chances of survival than their global counterparts due to higher profitability, lower net debt ratios, and better free cash flows.
  • A P/B ratio of 0.4x is considered a rock-bottom level for Korean steelmakers.
  • The report recommends a trading strategy for Korean steelmakers rather than aggressive accumulation, given the lack of structural demand recovery and the modest pace of restructuring.

Key Information

• China's Steel Industry:

  • Driven by infrastructure and real estate investments, but unlikely to recover structurally.
  • Facing internal and external pressure for restructuring, including supply-side reforms and international competition.
  • The restructuring process is expected to be slow, with local governments setting targets and the central government merely collecting them.
  • Marginal players are likely to exit the market due to heavy losses and rising debt.

• Investment Strategy:

  • Focus on minimizing downside rather than seeking upside.
  • Korean steelmakers should be evaluated based on their likelihood of survival, whether shares have priced in restructuring, and their strategies in a small improvement in conditions.
  • A P/B ratio of 0.4x is considered the bottom for the industry, and Korean steelmakers are not expected to face a valuation discount due to their strong fundamentals.

Company Highlights

• Posco (005490 KS, KRW206,500):

  • Recommended as a BUY with a target price of KRW300,000 (45.3% upside).
  • Has strong profitability, lower net debt, and better free cash flows compared to global peers.
  • A P/B ratio of 0.4x is viewed as the bottom for the industry.

• Hyundai Steel (004020 KS, KRW47,300):

  • Recommended as a BUY with a target price of KRW70,000 (48% upside).
  • Also has strong fundamentals and a P/B ratio of 0.4x as a potential bottom.

Summary

The steel industry faces a challenging environment, with China's demand and restructuring efforts playing a central role. The report suggests a neutral outlook, emphasizing the need to trade rather than invest aggressively. Korean steelmakers are seen as more resilient due to their better financial health and profitability, with a P/B ratio of 0.4x as a potential bottom. Restructuring in China is expected to be a slow and modest process, driven by both internal and external pressures, but the lack of market-driven reforms and insufficient funding may limit its effectiveness. The report highlights the importance of assessing whether shares have already priced in restructuring and the likelihood of survival for Korean players in this evolving landscape.