Shenwan Hongyuan Group: Guangdong Province accelerates the progress of ultra-low emission transformation, expected strengthening of constraints on the supply side of crude steel.

Shenwan Hongyuan Group released a research report stating that Guangdong Province, as a province with recent growth in crude steel production, clearly stipulating energy conservation and carbon reduction requirements implies enhanced constraints on the supply side. At the same time, with a macro-policy bias towards positivity, the fundamental situation of the steel industry will improve next year. Therefore, maintain an "optimistic" investment rating for the industry, as well as for key companies within the industry. Focus on two main themes in the future: stable performance high dividend stocks and undervalued state-owned enterprise stocks with good quality. Event: On December 23, 2024, the People's Government of Guangdong Province issued the "Guangdong Province 2024-2025 Energy Conservation and Carbon Reduction Action Plan" (referred to as the "Plan" below), targeted at the steel industry, which mentioned the need to "strengthen steel production capacity control, strictly implement the substitution of steel production capacity, strictly prohibit the increase of steel production capacity in the name of mechanical processing, casting, and iron alloys, strictly guard against the resurgence of obsolete steel production capacity, continue to implement crude steel production capacity control in 2024; strengthen the equipment sorting and screening of electric arc furnace steel companies, restrict and eliminate outdated production capacity in accordance with laws and regulations; in regions where the energy conservation and carbon reduction targets for the first three years of the 14th Five-Year Plan are lagging behind, steel production capacity should not increase in principle for the last two years of the 14th Five-Year Plan." Key points of Shenwan Hongyuan Group are as follows: In recent years, the overall crude steel production in the South China region has shown significant growth and is expected to become a key region for crude steel production control in 2025. According to data from the National Bureau of Statistics, in January-November 2024, China's crude steel production was 929.19 million tons, a year-on-year decrease of 2.7%; but the overall crude steel production in Guangdong, Fujian, and Guangxi provinces did not decrease but increased year-on-year: a cumulative increase of 10.2% from January to November 2024. Looking at a longer time period, in 2021-2023, the combined crude steel production of the three provinces was 93.75, 103.61, and 109.14 million tons, with year-on-year increases of 9.4%, 10.5%, and 5.3% respectively, showing a continuous growth trend in recent years. Guangdong Province explicitly requires energy conservation and carbon reduction, aiming to complete ultra-low emission transformation for all steel production capacity by the end of 2025. The "Plan" proposes to accelerate energy conservation and carbon reduction transformation in the steel industry: "By the end of 2025, the proportion of steel industry capacity above the energy efficiency benchmark level in the province will reach 40%, capacity below the energy efficiency benchmark level will complete technological transformation or be eliminated, and all steel production capacity will complete ultra-low emission transformation." This may constrain the steel supply side through the elimination of outdated capacity, reflecting the increased importance of steel production capacity and production control in the South China region. Next year, demand is expected to be resilient, and the industry's fundamentals are expected to improve. While there are expectations of strengthened supply constraints, recent macroeconomic policies have been relatively positive. On December 9th, the Central Political Bureau meeting proposed, "Next year, we will implement more proactive fiscal policies and moderately loose monetary policies, enrich and improve the policy toolbox, strengthen unconventional countercyclical adjustments, and implement more proactive and effective macroeconomic policies." With the release of new regulations on market value management, attention should be paid to the valuation recovery of undervalued steel stocks. In November 2024, the China Securities Regulatory Commission issued the "Listed Company Supervision Guide No. 10 - Market Value Management", requiring listed companies to improve their quality, enhance operational efficiency and profitability, and lawfully and compliantly use methods such as mergers and acquisitions, equity incentives, employee shareholding plans, cash dividends, investor relations management, information disclosure, and stock repurchases, based on actual conditions to promote the reasonable reflection of investment value of listed companies. Currently, there are many state-owned enterprise listed companies in the steel industry with a price-to-book ratio of less than 1. It is recommended to pay attention to stocks with good quality and expectations of asset injection. Investment analysis opinion: Focus on two main themes in the future. On one hand, pay attention to high dividend stocks with stable performance such as Baoshan Iron & Steel (600019.SH) and Nanjing Iron & Steel (600282.SH), as well as undervalued state-owned enterprise stocks with good quality, such as Hunan Valin Steel (000932.SZ) and Beijing Shougang (000959.SZ). Risk warning: Downstream demand lower than expected; raw material prices higher than expected, affecting steel company profits.