Steel prices might stay stiff. Despite expectations of easing demand from China due to the country’s rattled property sector, Worldsteel Association (source) remains optimistic on global steel demand and anticipates a growth rate of 2.2% YoY (2021: 4.5% YoY) in 2022, backed by higher-order backlog from the manufacturing sector combined with the rebuilding of inventories and further progress in vaccinations in developing countries. On the other hand, the supply of steel is expected to stay low as China (contributing 57% of the global supply) continues to curb production for the upcoming Beijing Winter Olympics as well as to achieve its carbon-neutral target by 2060. We expect steel price to remain firm amid sustainable demand coupled with restricted supply.
Buy on weakness and sell on strength. In general, steel demand tends to be lower in 4Q-1Q (Figure#1) due to lower construction activities during the winter. However, we expect demand and steel prices to improve post CNY amid restocking activities (Figure#3). HIAPTEK’s current low prices level provides an opportunity for investors to accumulate during weakness as current view of weak seasonal demand in steel is largely priced in, given its undemanding trailing P/E of 3.8x (78% lower than the 5-year average of 17.5x).
Expect good earnings. Although HIAPTEK’s downstream and trading segments margin is expected to normalize in 2QFY22 on the back of lower steel prices (Figure#2), we still reckon 1QFY22 strong earnings to be sustained into 2QFY22. Our optimism is supported by higher sales volume from both HIAPTECK and Eastern Steel (only operating for 2.5 months in 1QFY22) and improved cost structure following the completion of phase 1B of coke oven plant in Oct-21.
Building a base. Technically, HIAPTEK is building a sound base near RM0.45-0.49 territory, which offers great opportunity to accumulate in anticipation of an eventual sector recovery. A decisive breakout above RM0.50-0.55 will indicate a new uptrend has emerged, potentially pushing share prices to revisit RM0.60 levels. Cut lost at RM0.445.
Source: Hong Leong Investment Bank Research - 21 Jan 2022