The author is an analyst of NH Investment & Securities, He can be reached at will.byun@nhqv.com. -- Ed.
Prior to the spread of Covid-19, reliance on the traditional P/B valuation indicator was widespread. Although steel sector share prices should recover once the virus fades, the extent of rebound is likely to be limited by oversupply issues and sluggish demand. We expect Korea Zinc’s profits and financial stability to stand out amid strong metal prices.
Amid Covid-19, P/B levels fall to 0.1x level
Believing that the phrase ‘this, too, shall pass’ is worth keeping in mind regarding the Covid-19 situation, we advise remaining calm and preparing for likely post-pandemic developments. Once Covid-19 fades, we expect steel company share prices to recover. However, against a backdrop of structural oversupply and a temporary plunge in demand, share price improvement going forward is likely to be limited by sluggish demand due to economic recession.
Amid the spread of the virus, the traditional P/B valuation indicator has become virtually meaningless. Downstream industry (eg, construction/manufacturing) activity was temporarily suspended, and concerns towards economic downturn have intensified. As a result, Hyundai Steel’s (004020.KS) share price dropped to a P/B of 0.11x, and that of POSCO (005490.KS; recently selected as the most competitive steel company in the world for a 10th consecutive year) fell to a P/B of 0.27x.
On the manufacturing side, distribution inventories and company inventories in China have surged to historical high levels. Iron ore prices remained at pre-virus levels until mid-March. Gold prices, which had been strong before suffering a short-term dip (-12.5%) in March due to increased demand for cash, are rapidly rebounding in early April.
After Covid-19, steel prices to weaken and gold prices to rise
After the Covid-19 crisis, market attention is likely to focus on China’s stimulus measures. We expect China’s fixed asset investment this year to climb by 5.7%, a level we view as insufficient to push the steel industry into an expansion phase. We expect steel inventories to remain higher than normal throughout the year and place a burden on share price rebounds.
Going forward, we expect silver and gold prices to rise. Once the extent of the economic crisis was recognized, major central banks began collaborating to expand liquidity supply, and it is expected that ultra-low interest rates will sustain for some time, especially in developed countries. In the 2008~2011 global financial crisis, gold and silver prices jumped 1.7x and 4.4x, respectively, on the back of increasing liquidity supply.
We maintain a Neutral opinion on the steel and metal industry, and present Korea Zinc (010130.KS) as our sector top pick. Despite concerns towards economic downturn, we expect the firm to see stable EBITDA of W1tn pa and with stable financials including net cash of W2.1tn.