Aging Assets And Market Headwinds Will Squeeze Margins

Key Takeaways

• Structural decline in demand, overcapacity, and regulatory changes threaten margins, cash flow, and recovery prospects due to Maanshan's high costs and slow transition to green steel.
  
• Geopolitical risks and weak core market outlook expose the company to falling sales, disrupted exports, and increased raw material costs, endangering future profitability.
  
• Expansion into high-value products, operational efficiency, export growth, and sustainability efforts enhance resilience, margins, and position the company for stable, diversified long-term growth.

Catalysts

Manufactures and sells iron and steel products, and related by-products in Mainland China, Hong Kong, and internationally.

• The accelerating global transition to low-carbon technologies is leading to declining long-term demand for traditional steel products while also imposing substantial compliance costs on Maanshan Iron & Steel, particularly as China intensifies carbon reduction targets and competitors advance more quickly in green steel production; these twin pressures are likely to shrink both revenues and net margins over time as older blast furnace assets become less competitive and more expensive to operate.
  
• Demographic shifts and an extended slowdown in China's property and infrastructure sectors are expected to permanently reduce construction steel demand-a core market for Maanshan-threatening sustained annual declines in sales volumes and limiting any recovery in operating cash flow for the foreseeable future.
  
• Intensified geopolitical tensions, rising trade barriers, and growing protectionist industrial policies in key export markets threaten to curtail Maanshan's international revenue streams and increase raw material costs through supply chain disruptions, which would further depress both top-line revenue and bottom-line profit growth.
  
• Persistent overcapacity in the global steel sector, fueled by newer, more efficient plants in emerging markets, is expected to maintain downward pressure on steel prices; Maanshan's structurally high costs, aging production lines, and slow pace of technological adoption leave the company vulnerable to prolonged net margin compression and falling return on assets.
  
• Tightening environmental regulations and carbon pricing initiatives-both globally and domestically-will drive up fixed and variable costs for Maanshan Iron & Steel, forcing costly upgrades or even shutdowns of less efficient operations, thereby risking a long-term erosion of profitability and ultimately lowering future earnings per share.

Maanshan Iron & Steel Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Maanshan Iron & Steel compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Maanshan Iron & Steel's revenue will decrease by 1.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -4.7% today to 2.8% in 3 years time.
• The bearish analysts expect earnings to reach CN¥2.1 billion (and earnings per share of CN¥0.26) by about September 2028, up from CN¥-3.6 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 8.3x on those 2028 earnings, up from -5.0x today. This future PE is lower than the current PE for the HK Metals and Mining industry at 13.0x.
• Analysts expect the number of shares outstanding to decline by 0.32% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.87%, as per the Simply Wall St company report.

Maanshan Iron & Steel Future Earnings Per Share Growth

Risks

• Continued rapid urbanization and infrastructure investment in China's Yangtze River Delta and Belt and Road Initiative markets may drive steady demand for steel, which could help support revenue stability and offset declines from the shrinking real estate sector.
  
• Expansion and investments in high-value steel products, such as special steels for automotive, railways, wind power, and high-speed wheels, have already resulted in a significant year-on-year increase in sales of key products, supporting higher margins and earnings resilience as product mix improves.
  
• The company's strong push towards cost optimization through technology upgrades, green transformation, and process reforms has begun reducing per-tonne costs and is expected to further improve operating margins and cash flow over time.
  
• Successful development and expansion of export markets, highlighted by a 36% year-on-year increase in product exports, especially to Southeast Asia and Australia, can diversify revenue sources and reduce exposure to domestic cyclical downturns, supporting overall earnings growth.
  
• Active adoption of environmental sustainability measures, such as ultra-low emissions projects and increased use of scrap-based production, positions Maanshan Iron & Steel to benefit from tightening environmental regulations, potentially gaining market share and achieving premium pricing, positively impacting long-term profitability.

Valuation

• The assumed bearish price target for Maanshan Iron & Steel is HK$1.96, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Maanshan Iron & Steel's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of HK$2.8, and the most bearish reporting a price target of just HK$1.96.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be CN¥73.2 billion, earnings will come to CN¥2.1 billion, and it would be trading on a PE ratio of 8.3x, assuming you use a discount rate of 7.9%.
  
• Given the current share price of HK$2.54, the bearish analyst price target of HK$1.96 is 29.8% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.