Zhongjin: Profit and valuation are both at cyclical bottoms, and the clearance of the steel industry is expected to further accelerate.

CICC released a research report stating that at the current point in time, both profitability and valuation of the steel industry are at a cyclical bottom, there is no need to be pessimistic. The industry consolidation is expected to further accelerate, with high value-added steel varieties production and sales advantages, core assets with high quality cash flow are expected to achieve profit and valuation repositioning, excess returns are expected. The report recommends focusing on two main themes: 1) investing in core manufacturing assets with stable cash flow and dividends at the bottom, and specifically recommends Baoshan Iron & Steel (600019.SH) and Hunan Valin Steel (000932.SZ); 2) leading companies in special steel materials, especially leaders in the sub-sectors that benefit from the recovery of the manufacturing industry and growth certainty, and specifically recommends TIANGONG INT'L (00826), the global leader in high-growth tool and die steel. Data: The National Bureau of Statistics announced macroeconomic data for August: crude steel production fell by 10.1% year-on-year to 77.69 million tons, net steel exports increased by 17.6% year-on-year to 8.99 million tons, and the apparent consumption of steel decreased by 12.8% year-on-year to 68.70 million tons. Demand continues to differentiate, with strong export performance Real Estate: The construction index has slightly improved but remains at a low level. In August, real estate investment completion/new construction area decreased by 8.5%/-17.2% year-on-year to 0.84 trillion yuan/57 million square meters, with narrower monthly declines of 0.5/2.3ppt; new home sales continued to operate weakly with sales value/sales area down by 17.1%/-12.6% year-on-year to 0.64 trillion yuan/65 million square meters, showing that the current real estate volume and price still face downward pressure. It is expected that the demand for steel in real estate may not significantly improve in the short term. Infrastructure: Funding and physical work are marginally stabilized, with infrastructure investment up by 4.4% year-on-year, and excavator working hours up by 3.3% to 93 hours. Manufacturing: The August manufacturing PMI dropped slightly by 0.3ppt to 49.1%, downstream sentiment is showing differentiation, with steady growth in production and sales in sub-sectors such as ships/engineering machinery. Export: Steel net exports in August increased by 17.6% year-on-year to 8.99 million tons, indicating strong external demand. However, global PMI is still in the contraction zone with a downward trend, coupled with the gradual narrowing of China's export steel price advantage, looking ahead we believe steel exports may show signs of a high-level downturn. Raw material supply and demand trend weakens, the profitability of the black industry chain is expected to undergo rebalancing Since the third quarter, prices in the black industry have weakened, with steel companies' profit margin falling below 5%, close to historical lows. Quality leading steel companies represented by Baoshan Iron & Steel/Hunan Valin Steel have shown steady profitability, with 1H24 ton steel net profit still maintained at over 100 yuan (the average for the steel industry being -45 yuan). The bottom excess profits continue to be sustained. Since September, raw material prices have continued to decline, rebar spot prices rebounded after hitting a low, with immediate production profits significantly rising to 70 yuan/ton, signaling a marginal recovery in industry profitability. Looking ahead, CICC expects that in the fourth quarter, Mongolian coal imports and overseas ore shipments will continue to increase, with the supply and demand weakening effect likely to keep raw material prices running at low levels. The profitability distribution of the black series is expected to undergo rebalancing, and steel companies with strong product structure advantages and bargaining power are expected to fully benefit, with profitability resilience possibly exceeding expectations. Risk factors: Deterioration in real estate market sentiment, global economic downturn.