Steel industry still faces many risks: top broker SSI

By Nhat Huynh, Huong Dung
Thu, January 12, 2023 | 2:29 pm GMT+7

Domestic steel demand is expected to continue falling due to the stagnant real estate market and tightened monetary policy, according to Vietnam's leading broker Saigon Securities.

Citing data from the Ministry of Construction, SSI Research said that the number of apartments licensed for construction in the first three quarters of 2022 plunged by 41% year-on-year. In addition, the implementation of backlogged projects may also be delayed as investors are facing liquidity problems.

The household channel, which showed a better recovery, could also be affected by a slowdown in the overall economy, with higher unemployment and interest rates.

SSI Research believed that the domestic demand for finished steel products may suffer a single-digit decline in 2023. However, the acceleration of public investment may help offset some of the reduced steel demand from households.

Hot rolled steel coil of Hoa Phat Group. Photo courtesy of the company.

Hot rolled steel coil of Hoa Phat Group. Photo courtesy of the company.

According to the broker, steel exports have slumped due to the recession, but are likely to recover by the end of the year. The World Steel Association said that steel demand is expected to recover 1% year-on-year to 1.8 billion tons in 2023, after falling 2.3% in 2022.

Demand in both the U.S. and European markets is predicted to drop this year as a result of the economic downturn, while that in the ASEAN market is forecast to remain stable, after growing 4-6% in 2022.

Vietnam’s exports to long-standing trade partners may be affected by the capacity increases in recent years in neighboring countries such as Malaysia, Indonesia, and the Philippines.

"We forecast finished steel exports may fall by more than 10% year-on-year this year. Company profits may recover from 2023 but risks remain high. Weak demand could lead to low efficiency, which will put pressure on their revenue, cash flow and profit margin this year,” SSI Research noted.

In addition, the narrowing price gap between Vietnam and other markets will make export profit margins less attractive than 2020-2021, it added.

This analysis group believed that the profit of the steel industry will continue to decrease in the first half of 2023 and gradually bounce back at the end of the year thanks to a possible demand recovery in both domestic and export markets.

The industry's 2023 forward P/E (price to earning ratio) valuation is in the range of 10-20x, well above the historical average of 8-10x and even higher than the level of 10-13x during the recession.

On the other hand, the P/B (price-to-book ratio) of key stocks such as HPG of Hoa Phat, HSG of Hoa Sen Group, and NKG of Nam Kim is currently in the range of 0.6-1x, 20% below the historical average, but still 20-30% higher than the low valuations in the previous bear markets of 2011 and March 2020.

"We do not expect steel companies' P/B to recover significantly in the short term, as the ROE (return on equity) is likely to stay around historic lows in 2023."

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