Steel prices rising. Following the Ukraine-Russia conflict, steel rebar and hot rolled coil (HRC) prices have resumed their upward trajectory, rising 12% and 8% YTD, respectively, owing to the disrupted logistics, sanctions, and skyrocketing energy prices. World steel’s supply and demand dynamics turned tight given that Russia and Ukraine play an essential role in supplying steel products to the world, which accounted for about 10% of the international steel trades. This situation is further worsened after China announced a city-wide lockdown amid its Zero-COVID policy, which kept steel output subdued. Tangshan, which accounted for ~15% of China’s total steel output, has been in lockdown since 20 Mar, resulting in daily production loss of 30k -35k tonnes. Moreover, EU steel makers are beginning to slash their output as the higher costs make production unsustainable.

Better earnings visibility in 2HCY22. We reckon HIAPTEK’s tepid lacklustre 2Q might extend into 3Q as the rising steel prices since March will not be reflected due to the lag effect (~2-month lag). Moreover, factory shutdowns due to CNY will translate to lower revenue in 3Q. Beyond that however, HIAPTEK is expected to report stronger earnings, thanks to the higher ASPs coupled with recovering steel demand after the CNY. We gather that the private sector is the one driving the steel demand now, with momentum picking up from the property and manufacturing sector. On the other hand, demand from the public sector (e.g. infrastructure) is expected to pick up in 2HFY22. Hence, we opine that investors should look beyond the potential lacklustre 3Q in anticipation of a more exciting 4Q and FY23 earnings.

The carbon emission target. As China still maintains a strict adherence to the global carbon emissions targets by 2025-2050, this could result in a loss in steel capacity from the top steel-producing countries. The supply-demand mismatch is expected to alter the shape of the world steel supply, cushioning any downward movement in steel prices. To recap, China is committed to achieving its steel output reduction target - crude steel output not higher than the 1.065bn MT it made in 2020 - to meet its carbon emission by 2025. The Chinese government has ordered major steel mills nationwide to either reduce or stop production altogether to achieve this target. International Energy Agency foresees Chinese steel production to slide by 40% in 2060 compared to 2020 levels. As China produced ~52% of the world's steel in 2021, the lost supply is likely to be partially fulfilled by new capacity from ASEAN countries (Figure#3).

Accumulate during weakness. After plunging 36% from a 52-week high of RM0.68 to RM0.43 last Friday, HIAPTEK is currently trading at its mid-term support area of RM0.40-0.43. A decisive breakout above RM0.475 will indicate a new uptrend leg had happened, and spur the prices toward RM0.50-0.54 levels. Cut loss at RM0.37

Source: Hong Leong Investment Bank Research - 4 Apr 2022