Review

In 1Q24, all the building material stocks under our coverage reported results that were below our expectations except for CSCSTEL.

ANNJOO continued to report a core net loss, primarily due to lower-thanexpected average selling prices (ASPs) and reduced sales volumes caused by subdued market demand. Similarly, CHINWEL posted disappointing results, with a lower-than-expected profit contributions from its fasteners and wire divisions, driven by market uncertainty and weak demand in the European region. Additionally, CMSB's results fell short of our expectations, mainly due to lowerthan-anticipated sales volumes in its cement division, attributed to slower construction activities in the Sarawak region.

In contrast, CSCSTEL was the only company that reported results in line with our expectations. We attribute this to its higher sales volume amidst growing orders from customers and a rebound in steel prices.

In general, the common dampeners for building materials counters under our coverage were lower ASPs and weak export sales.

Outlook

Despite the persistent global downturn in steel prices and demand, driven by China's real estate crisis and overcapacity issues, we anticipate a gradual recovery in domestic sales volumes in the later part of 2024. This recovery is expected to be fueled by growing demand from the construction and industrial sectors, largely due to the resumption of major infrastructure projects. Additionally, the revitalisation of the domestic property sector is proving beneficial for the building materials industry, particularly steel producers. With the ongoing recovery in the property sector, an increase in project launches, and rising construction activities, the demand for steel products is expected to improve, leading to higher ASPs.

Recommendation

We reiterate our NEUTRAL recommendation on the building materials sector. We have downgraded CMSB from Hold to Sell as we believe the stock is fairly valued considering the recent strength in its share price. Meanwhile, we are cautiously optimistic about the steel industry’s long-term outlook, following a stronger commitment from the government to mitigate the overcapacity and steel dumping following the 2-year moratorium on the expansion and diversification of the country’s steel-making industry. Hence, we keep our Buy call on CSCSTEL while upgrading ANNJOO to Buy premised on a higher target PER 11x, considering the improving prospects in CY25. On the other hand, we maintain Sell call on CHINWEL as we believe the group is not out of the woods yet.

Source: TA Research - 5 Jun 2024