Review of 1HCY24

Even though steel costs began to stabilize in the 1HCY24, most steel manufacturers continue to face high production costs and ongoing weak demand. This is largely due to delays in the rollout of major domestic infrastructure projects and a subdued average selling price (ASP) resulting from supply-demand imbalances. As observed in our sector coverage, the weak 1Q24 earnings reported by steel companies such as ANNJOO and CHINWEL reflect this challenging environment. Domestic steel players continued to be weighed down by weak demand and high production costs

Steel Prices Are Likely to Remain Lacklustre in 2HCY24

Given the disappointing results of the Chinese government's efforts to resolve the property crisis and address steel overcapacity, we remain cautious about the outlook for steel market. Additionally, global demand has been further weakened by persistent inflation and escalating logistics disruptions due to the Red Sea crisis. In May 2024, China's average steel bar price was RM2740.0 per metric tonne (-0.7% MoM, -7.1% YoY, -3.9% YTD). Consequently, steel prices in Malaysia have also remained subdued, mirroring the trends in China's steel market. The demand recovery from China is still slow

Domestic Demand Is Set to Recover Gradually

Despite the challenges, we have observed an increase in new property launches in 2QCY24, driven by the revitalisation of the property sector. We believe this trend will stimulate construction activities and boost demand for building materials, particularly concrete and steel-based products. Notably, steel-based products constitute approximately 35% of the cost of goods sold in construction activities. A glimpse of hope is on the card for steel industry

Looking Forward to New Mega Infrastructure Projects

Following the government’s greenlight for the Penang LRT project, we anticipate that the project's details and scope will be finalised by the end of 2024, with construction commencing in 2025. This development is expected to inject new momentum into the steel industry, supporting the construction of railroads and related infrastructure. Additionally, we await further announcements on the MRT3 project following the conclusion of the extended tender validity in March 2024. The KL-SG High Speed Rail project is also on our radar, although the financing scheme still under negotiation.

In East Malaysia, particularly Sarawak, demand for building materials remains robust due to ongoing local mega infrastructure projects such as the Pan Borneo Highway, Sarawak Coastal Road, and Baleh Dam. With the earmarked budget of RM7.2bn from the federal government, Phase 2 of the SabahSarawak Link Road should commence by end-24.

All in, we anticipate a positive outlook for the building materials industry in 2025, which will be bolstered by the anticipated rollout of several large-scale infrastructure projects.

Recommendation

Despite our cautious optimism on the sector, we believe that a good turnaround should take a while to materialise. Hence, we maintain our Neutral recommendation for the building material sector. Post-1QFY24 result, we have upgraded ANNJOO to Buy call to reflect its positive outlook in CY25. Meanwhile, we maintain our Buy on CSCSTEL and PGF, driven by resilient market demand. That said, we reiterate our Sell call on CHINWEL and CMSB due to valuation grounds.

Notably, we have selected PGF as our top pick for the sector, underpinned by the following reasons:- (i) escalating demand for glass wool due to its ecofriendly insulation material nature, (ii) potential to capitalise on the Proton City AHTV, and (iii) sustainable business with strong ESG awareness.

Source: TA Research - 2 Jul 2024