Korean steelmaker stocks undervalued on weak property market

[Courtesy of Hyundai Steel]

The stocks of South Korean pure-play steel companies have rebounded this year but their price-to-earnings ratios (PBRs) remain at an all-time low of less than one-third of their book value as the local housing market slows and concerns persist over a downturn in the Chinese economy.

According to Samsung Securities Co. on Sunday, the PBR of Daehan Steel Co. was estimated at a record low of 0.28 times on Friday after accounting for the company’s expected earnings this year.

A PBR shows the ratio of a company’s trading stock price compared to its net assets. A value below 1 indicates that the company is worth less than its liquidation value.

While the stock yield of Daehan Steel has outperformed the market average at 23 percent this year, the company’s PBR is still at its lowest level since 2013. The stock has rallied over the last one month on growing expectations for a stimulus package from the Chinese government, but the PBR has lowered due to lack of confidence in the industry’s full recovery.

This year’s estimated PBR of Hyundai Steel Co., with shares up 27 percent year-to-date, stands at 0.26 times, slightly up from 0.21 times at the end of last year, but it is still undervalued. The company’s PBR has been trending downwards from 0.31 times in 2020 and 0.3 times in 2021.

In the third quarter, Hyundai Steel is projected to post 6.52 trillion won ($4.88 billion) in sales, down 9 percent from the previous quarter, and an operating profit of 346.1 billion won, down 26 percent. The fall comes on sluggish domestic construction industry.

“The slowdown in the third quarter is attributed to the sluggish demand for steel bars from downstream industries due to declining housing construction, among others, and narrowing spread estimates on the decline in selling prices amid the sluggish global steel industry,” said Park Hyun-wook, an analyst at Hyundai Motor Securities Co.

Daehan Steel is also expected to underperform.

“The second half of the year is likely to see slower earnings than the first half,” said Kim Hyun-tae, an analyst at BNK Securities Co. “This is because construction areas, the leading indicator for steel bars, have been declining since the second half of last year and are expected to decline even further in the first half, and the impact is likely to be reflected in the second half. Steel bar prices and spreads have been weakening starting May and have continued declining in July and August.”

The slowing Chinese economy is another contributing factor. A slowdown in Chinese demand affects the entire global steel market as it accounts for 53 percent of total demand. Once steel prices in China fall, they pull down global steel prices together, having huge impact on even the performance of domestic companies with a small export share.

“There are growing expectations for a recovery in the (Chinese) housing market, but the actual numbers suggest that the industry is still in difficult times,” said Park Gwang-rae, an analyst at Shinhan Securities Co. “China’s real estate investment in July was down 17.8 percent year on year, and the cumulative figure between January and July was down 14.8 percent from a year ago.”

Meanwhile, analysts are voicing positive outlooks for the steel industry after this month as valuations of the steel companies are at a marginal level and China is likely to scale back steel production. China’s average daily crude steel production in the second half of last month was 200 million and 500 tons, down 7.6 percent from the previous week and down 4.2 percent from the previous month, according to Shinhan Securities. It is also 6.9 percent lower than the recent three-month average.

There are also signs that the Chinese government is trying to cut steel production. Some steel mills in the northern Chinese city of Tianjin have been instructed to keep production below 2022 levels.