Several positive developments in China (which include easing Covid tracking rules, and government support package) has prompted us to turn more positive on HTVB. While optimism arising from the development may not translate to actual steel demand so soon (due to seasonal factor), there are indicators which signals that the steel sector may soon be out of the woods. We maintain earnings forecasts, but upgrade on rating on HTVB to BUY, with higher TP of RM0.33, following the roll-forward of valuation base year (from CY23 to FY07/24).

Several positive developments. Several positive developments in China have boosted optimism on China’s property market, which will in turn aid demand for steel, if materialises. These include:

(i) easing of Covid tracking rules, which indicates the Chinese government’s intention to move towards reopening the economy and adds more certainty to the implementation of its previously announced stimulus plan; and

(ii) announcement of government support package (which include, amongst others, requiring banks to roll over their loans to the property sector, providing builders with more time to complete unfinished projects, etc.), which is aimed at reviving the property sector in China.

Actual demand may not come in soon, but worst may soon be over. While the abovementioned developments may not translate to actual steel demand so soon (as winter season typically slows construction activities and demand for steel in China), there are indicators which signal that the steel sector may soon be out of the woods. These include (i) low inventory levels of iron ore and steel in China (see Figures 1- 2), which will likely support near term restocking activities, and (ii) relatively low crude steel output in China (see Figure #3).

1QFY23 results preview. We believe HTVB’s 1QFY23 earnings (due out by end Dec) will likely weaken from 4QFY22, due to (i) high key input costs and lower steel prices, hence resulting in sharp deterioration in profitability, and (ii) depressed demand sentiment amidst weak steel price trend and steel construction activities. Moving into 2QFY23, while margin will likely recover (when inputs acquired at high costs are depleted), demand will remain weak in 2QFY23 on seasonal factor.

Forecast. Maintain, pending release of 1QFY23 results (due out by end-Dec). We expect HTVB’s earnings performance to remain subdued in 1HFY23, and pick up from 2HFY23 onwards.

Upgrade to BUY with higher TP of RM0.33. As we are turning more positive on HTVB’s medium term prospects, we take the opportunity to roll forward our valuation base year to FY07/24 (from CY23 earlier). Correspondingly, we upgrade our rating on HTVB to BUY (from Hold earlier), with a higher TP of RM0.33 (from RM0.24 earlier) based on 7x FY07/24 core EPS of 4.8 sen. HTVB is trading at FY23-25 P/E of 10.3x, 5.6x and 5.2x, respectively.

Source: Hong Leong Investment Bank Research - 17 Nov 2022