We remain upbeat on HTVB’s earnings prospects, backed by (i) improving demand prospects for steel products (evident by major steel producers’ recent moves to raise selling prices amid seasonally low demand season), (ii) low steel inventory in China, which will likely support near term restocking activities, and (iii) relatively low crude steel output in China. We raise our FY23 - 25 core net profit forecasts by 16.1/14.6/16.1%, mainly to account for higher EBIT margin assumptions at trading and downstream manufacturing segments, and marginally higher average selling price assumptions at ESSB. Post earnings revision, we maintain our BUY rating on HTVB with a higher TP of RM0.38 based on 7x revised FY24 core EPS of 5.4 sen.

Performance recovery on track. We remain positive on HTVB’s earnings recovery prospects, supported by (i) improving demand prospects for steel products (evident by major steel producers’ recent moves to raise selling prices amid seasonally low demand season), (ii) low steel inventory in China (see Figure #1), which will likely support near term restocking activities, and (iii) relatively low crude steel output in China (see Figure #2).

Earnings recovery from 2QFY23, albeit a gradual one. We anticipate HTVB’s performance to improve in 2QFY23, as lacklustre demand for steel products (arising from slower construction activities during Lunar New Year month and rainy season) will likely be mitigated by lower raw key input prices (as inputs acquired at high costs have mostly been depleted in 1QFY23) and higher steel product prices (which have recovered by ~15% since end-1QFY23). We anticipate HTVB’s earnings recovery momentum to pick up further from 2HFY23, supported by (i) seasonally higher construction activities locally (which will in turn lend support to steel demand) and (ii) implementation of stimulus plans in China.

Over the longer term… HTVB’s earnings growth will be driven by (i) ESSB’s (Eastern Steel, a 27.3%-owned unit of HTVB) major expansion plan (slated for completion by early-2024, the expansion plan will transform ESSB into an integrated steel producer), and (ii) China’s policies to reform its steel sector, which will result in more stable profitability among steel players in the region.

Forecast. We raise our FY23-25 core net profit forecasts by 16.1/14.6/16.1%, mainly to account for higher EBIT margin assumptions at trading and downstream manufacturing segments, and marginally higher average selling price assumptions at ESSB.

Risks to our call. These include (i) full blown global economy slowdown, (ii) hiccups in China’s stimulus plan implementation and economy reopening, and (iii) recovery in key steel input prices (in particular, iron ore and coking coal) outpacing steel product prices.

Maintain BUY with higher TP of RM0.38. Post earnings revision, we maintain our BUY rating on HTVB with a higher TP of RM0.38 (from RM0.33 earlier) based on 7x revised FY24 core EPS of 5.4 sen. We continue to like HTVB for its (i) healthy balance sheet (net gearing of 0.32x as at 31 O ct 2022), and (ii) multi-year growth potential in ESSB’s earnings, supported by its continuous efforts in enhancing cost efficiencies and major capacity expansion. At RM0.335, HTVB is trading at FY23-24 P/E of 11.4x and 5.4x respectively, and current P/B of 0.48x.

Source: Hong Leong Investment Bank Research - 30 Jan 2023