Share Price Reflecting Economic Slowdown
The author is an analyst of NH Investment & Securities. He can be reached at will.byun@nhqv.com. -- Ed.
POSCO Holdings’ 2Q22 OP is forecast to top consensus. However, earnings are likely to fall in 2H22 due to global steel price decline. While expectations remain in play for China’s infrastructure-related investment demand, product price trends should stay weak amid the summer low season and inventory adjustments.
Share price reflecting economic slowdown rather than expectations for Chinese stimulus
Although adhering to a Buy rating, we lower our TP on POSCO Holdings (005490.KS) by 16.2% from W370,000 to W310,000. Our TP corresponds to a 2022E P/E of 5.6x and P/B of 0.5x (ROE of 9.2%). Despite expectations for economic stimulus in China in 2H22, POSCO Holdings’ share price has remained bearish, reflecting the possibility of a recession caused by monetary tightening. Steel price decline is to become evident from July, raising concerns over earnings decrease. However, we believe that the firm’s share price has been proactively adjusted to reflect sluggish industry conditions.
China’s HR retail prices have slid around 16% from their peak in April. At home, the domestic HR distribution price sits at W1.24mn/ton, down 12% from the 1H22 high. We expect the downward pressure on steel prices to rise, with Chinese players suggesting an HR price (offer price to Korea) of around US$700/ton, the iron ore price sliding to US$120/ton, and the hard coking coal price dipping to US$315/ton. Although Chinese government demand for infrastructure investment should emerge in 2H22, the impact on the steel market is likely to await the high season (September~October), after inventory adjustments and the summer low season pass.
2Q22 preview: OP to exceed consensus
POSCO Holdings is forecast to report consolidated 2Q22 sales of W21,737.9bn (+18.8% y-y, +1.9% q-q), OP of W2,113.1bn (-4.0% y-y, -6.4% q-q), and NP (excluding minority interests) of W1,316.4bn (-20.9% y-y, -23.1% q-q), with sales and NP to arrive in line with consensus and OP to beat the market projection by 8.7%.
At operating company POSCO, 2Q22 OP is estimated at W1,241.3bn (-22.8% y-y, +3.5% q-q), with ASP increase likely proving slightly stronger than raw material price expansion. In terms of global infrastructure business (trade, construction, energy), profits at the energy business likely slid on a decline in the SMP, but profits at the trade business likely improved on the back of oil price growth.