中国钢铁与房地产行业：将房地产周期与钢铁企业的盈利能力联系起来

1、GlobalResearch30 October 2019China Steel and PropertyChinaUBSEvidenceLabinside:connectingthedotsfrom thepropertycycletosteelmillsprofitabilityChinaProperty cycles and steel demand/profitabilityUBSEvidenceLabprocessedextensivehistoricalstatisticsanddevelopedfourinteractive models to aid investors kee

2、n to monitor China property new starts, apparent steel demand, and steel mills profitability. Each model allows investors to forecast the trajectoryofupcomingquartersbasedonknownfactorsorassumptions.Wefoundthe quantitativeinteractivemodelslargelyechoourviews,whicharebasedonfundamental research,andbe

3、lievetheycouldhelpinvestorsidentifykeydriversandtheircorrelation when they form their projections on the sectors.Property cycle: new starts should slow down in 2020EUBSEvidenceLabbuiltaone-quarterleadpredictivemodelofconstructionnewstarts using 300 cities land sales and national property sales GFA a

4、fter examining multiple potential leading indicators. Due to a cooling land market (-6% YoY Q319 land sales GFA) and sluggish property sales growth in Q219 (-1% YoY), we forecast almost flat (1%)newstartsYoYforQ419from6%inQ319,asperUBSEvidenceLabspredictive model. Our 2019/20/21 new start forecasts

5、are 7%/-3%/-1%, reflecting declining propertysalesin2020E/21Eandassumingnomajorpolicystimulus.China apparent steel demand driven by three major demand driversInourtraditionaltop-downdemandmodel,property,infrastructureandmanufacturing arethethreemajordemanddriversofChinesesteel.TheUBSEvidenceLabmodel

6、for Chineseapparentsteeldemandhelpstovalidatethesedrivers.However,interestingly, theUBSEvidenceLabsurveyfoundthatChinagovernmentfiscalsavingsYoYhavea reverse correlation to steel demand YoY historically, contrary to conventionalwisdom aboutTotalSocialFinancing(TSF)beingthemostrelevantfactor.Wealsobe

7、lievethe UBSEvidenceLabinteractivemodelhelpsexplainreportingissuesaboutChinasteel production in 2019.China steel mills profitability set to decline further in 2020EAnotherUBSEvidenceLabmodelalsofoundthatthreemostrelevantfactorsaffecting mid-term China steel mill profitability are: 1) mid-downstream

8、manufacturers restocking/destocking; 2) Chinese steel traders inventory; and 3) steel apparent demand. Based on these, our conclusion is that unless there is strong restocking by mid-downstream manufacturers, Chinese steel mills profitability will not improveYoY in2020E.Thisechoesourcautiousviewofth

9、eChinasteelsector.SteelEquitiesJamesKanSteelEquities HYPERLINK mailto:james.kan +852-29716334John Lam,CFA HYPERLINK mailto:john-za.lam +852-29716358MarkLeung HYPERLINK mailto:mark.leung +852-29718636HanZhang HYPERLINK mailto:han.zhang +852-29718674 HYPERLINK /investmentresearch /investmentresearchTh

10、isreporthasbeenpreparedbyUBSSecuritiesAsiaLimited. ANALYSTCERTIFICATIONANDREQUIREDDISCLOSURESBEGIN ONPAGE20. UBSdoesandseekstodobusinesswithcompaniescoveredinitsresearchreports.Asaresult,investorsshouldbe aware that the firm may have a conflict of interest that could affect the objectivity of this r

11、eport. Investors should consider thisChina Steel SectorUBS Research THESIS MAP a guide to our thinking and whats where in this reportMOSTFAVOUREDLEAST FAVOUREDChinaOrientalMaanshan A & HPIVOTALQUESTIONSQ:WillChinasteelsectordemand/supplydeteriorateandaffectsteelmillsprofitability?Yes.Steelcapacityin

12、Chinahasincreased.Basicoxygenfurnaceshaveflexibilitytodigestmorescrap steel, while more electric arc furnaces have been built with more due in the next two years. We estimate effective capacity will increase 6.7% in 2019 and almost 2% pa in 2020-21. Government support for infrastructure could offset

13、 potentially weak demand from the property sector, while fallingdemandfromweakautosalescouldbemitigatedbyindustrialmanufacturerslowinventory. Hence, we expect China steel demand to grow 1% to -1% in the coming years. Almost flat or decliningdemandtogetherwithmoreincrementalsupplycouldtranslatetopoor

14、millprofitability.”China Steel Sector: Structurally unstable; negative outlook” 5/16/2019Q: Will scrap steel oversupply impact China steel mills profitability?Yes. We believe scrap steel will marginally affect the steel industrys profitability in 2019E and 2020E,asscrapsteelsupplyincreases.However,w

15、eforecastascrapsteelCAGRofalmost10%in 2020-23E,whichincreasesourEAFutilisationrateforecastfrom68%to76%in2023E.Hencewe expectadownwardtrendforblastfurnacesutilisationrateandprofitabilityoverthesameperiod.”China Steel Sector: Structurally unstable; negative outlook” 5/16/2019UBSVIEWWe expect 2019 stee

16、l supply/demand to deteriorate with overall demand growth of 1.1% YoY, whileoverallcapacityshouldincrease6.7%YoY.Weestimatethesteelindustrysutilisationratewill deteriorate from 88% in 2018 to 84% in 2020E. Profitability should also continue to deteriorate. A pick-upinsteelscrapsupplycouldresultinche

17、aperscrapsteelpricesandfurtherundermineblast furnacesprofitability.Givenourlowerearningsestimates,GP/tonaveragecouldfallRmb300/tYoY in 2019E and by around Rmb100/t YoY in2020E.EVIDENCESupply/demand balance should deteriorate from 2019 based on our analyses of FAI in the steel industry, property sale

18、s, infrastructure projects and auto sales, and also inventories and capex of mid/downstreammanufacturers.Ourresearchalsoindicatesscrapsteelsupplywillaccelerate,driven by a higher recovery ratio for steel reserves and the rapid growth of newly approved scrap processors.Ananalysisofthehistoricalpriceg

19、apofrebarpricesagainstscrapsteelpricesindicates thecostadvantageofblastfurnace(BF)overEAFweakenswhengraphiteelectrodepricesdecline.WHATSPRICEDIN?Based on H119 results, we set our 2019/2020 GP/t estimates at Rmb440t/Rmb330/t, Rmb100t/Rmb200/t below market consensus. We continue to think consensus: 1)

20、 might be underestimating effective supply additions; and 2) is overly optimistic as we forecast the industry utilisation rate to continue to fall and the trajectory of the utilisation drop suggests a deeper-than- consensus GP/tfall.Historical and forecast GP/t weighted average and consensus GP/tRmb

21、/t0201420152016201720182019E*2020E*GP/tweightedaverageGP/tconsensusChinasteelsectorutilizationrate(RHS)90%85%80%75%70%65%Note:WeightedaverageGP/tbasedonhistoricalandUBSproduction(sales)volumeestimatesforBaosteel,ChinaOriental, Angang and Maanshan. *GP/t consensus = consensus gross profit/UBS product

22、ion (sales) volume estimates for the companies. Source: Company data, Thomson Reuters, UBSestimatesChina Property (A and H)UBS Research THESIS MAP a guide to our thinking and whats where in this reportMOSTFAVOUREDLEAST FAVOUREDH-share: COLI, A-share: VankeH-share: CIFI, Future Land, Agile, KWG, Jinm

23、aoPIVOTALQUESTIONSQ: What does developers actual leverage looklike?Weestimatetheactualleverageforthe67developers(arounda60%marketshareinChina)isthe highestsince2014,duetoaggressivelandacquisitionin2017andH119.Also,cross-checkswiththe balance of trust financing suggest it has increased 120% since2017

24、.“What do we know about off-balance sheet debt and liquidity?” 9/26/2019Q: Are developers 2020-21 margins at risk?Yes, we think consensus has not factored in the falling margin in 2020-21E. The substantial land price appreciation and price cap since 2017 should start to hamper 2020-21E P&Ls, after p

25、eak margins in 2018-19E. Our 2020-21 earnings estimates are 6-9% below consensus.”Are 2020-21 margins at risk?” 7/23/2019Q: Where are we in the China property cycle?After an upcycle in 2017-18, we expect a moderate slowdown in 2019, driven by the fading contributionfromshantyredevelopmentandweakerpu

26、rchasesentiment.Wethinkthisdowncycleis demand-driven,unlikethesupply-drivendowncyclesinH211-H112and2014.Weviewthisasmore positive,asdemandcanbestimulatedbygovernmentpolicyormortgagerates/accessibility,whileit takes much more time for the market to digest oversupply.US Eviece Lab ise:cyce s ealtier t

27、an ast cycs; assue coveae with psve view” /09UBSVIEWOur view on China property remains bearish and we anticipate a gradual decline in residential new start growth due to: 1) declining housing demand in the long term; 2) weak property sales and increasing inventory in the medium term; and 3) slowing

28、land acquisition due to tighter liquidity and weak sell-through in the near term.EVIDENCEDue to the cooling property market, 9M19 residential GFA sold was 1,047m sqm, up 1% YoY, weakerthanthe2%YoYgrowthin2018.ResidentialnewstartGFAin9M19grew9%YoY,weaker thanthe20%YoYreportedin2018,butmuchstrongertha

29、npropertysalesgrowth,whichhasledto inventorypilingupandthedecliningtrendfornewstarts.Ourchecksofconcretepilesales,cement productionandexcavatorsalessuggestthesamedeclineingrowthforshort-termnewstarts.WHATSPRICEDIN?We believe the market has priced in developers expanded leverage and the tighter fundi

30、ng environment.However,thepotentialdowncycleforresidentialnewstartsisprobablynotreflectedin share prices.National new starts, sales area, and cumulative inventorySector wasadding stockSector was destockingInventory down12% from peakm sqmm sqmSector wasadding stockSector was destockingInventory down1

31、2% from peak2,0003,5003,0002,5002,0001,5001,000500Jan-05 Jul-05 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19Source: CEIC, UBSInventory in thep

32、ipeline (RHS)Completion (T12M, LHS)New starts(T12M,LHS)Sales area (T12M, LHS)Property cycles and steel demand/profitability outlookUBSEvidenceLabhasprocessedextensivehistoricalstatisticsanddevelopedfour modelsforinvestorskeentofindoutabout:1)Chinapropertynew starts;2)steel apparent demand; and 3) st

33、eel mills profitability (i.e. steel spread). Each model allows investors to forecast trajectory over coming quarters based on known factors/assumptions.Wefoundthequantitativeinteractivemodelslargelyechoour views that are based on fundamental research and believe they could help investors identify ke

34、y drivers and their correlation when they form their projections on the sectors.China property: new starts may slow in2020EConclusion: we expect Q419 new starts to remain almost flat YoY (1%) from 6% growth in Q319, due to a cooling land market in Q319 and sluggish property sales inQ219Methodology:

35、UBS Evidence Lab built a linear regression model (link) to predict China residential property construction new start GFA. After examining multiple potentialleadingindicatorsfornewstartareasviaacorrelationcoefficientcheck, we note that land sales (planned GFA for residential land sold in auctions in

36、300 cities, 3mma YoY) leads by one quarter for new start area, while property sales (nationalresidentialGFAsold,3mmaYoY)leadbytwoquarters.The underlying assumption is that land transactions represent near-term constructionstartsanddevelopersfinancingcapability,andalsoreflectdevelopers outlook for th

37、e property market. We back-tested the model with actual construction starts and the two-factor model yields 68% r-square and the two explanatory variables (property sales and land sales) have a 0.03/0.00 P-value, indicatingthemodelexplainsapproximately68%ofnationalresidentialnewstart area statistica

38、lly at a 5% significancelevel.Figure 1: We estimate almost flat YoY (1%) growth for new start GFA in Q419 based on UBS Evidence Labs predictive model due to cooling land market100%UBS Evidence Labs predictive model of China property construction starts Predicted PredictedYoYActualYoY60%40%20%0%-20%2

39、007-092007-122007-092007-122008-032008-062008-092008-122009-032009-062009-092009-122010-032010-062010-092010-122011-032011-062011-092011-122012-032012-062012-092012-122013-032013-062013-092013-122014-032014-062014-092014-122015-032015-062015-092015-122016-032016-062016-092016-122017-032017-062017-09

40、2017-122018-032018-062018-092018-122019-032019-062019-092019-12Source: UBS Evidence Lab, UBS1-A: 300 cities land transaction GFA (one quarter lead): a cooling land market.InQ319,residentiallandsalesGFAwasreportedat235msqm,down6% YoY (vs +26% YoY in Q219) due to tightened regulations regarding develo

41、per financing, especially trust financing which is related to land acquisitions. See our balance sheet report for more detail. Since May 2019, we note falling land price premium and also a rising number of failures of land auctions due to tighter liquidity for developers. Assuming tighter liquidity

42、is unchanged, we expect the landmarkettoremainsluggishinQ419-Q120,duetoarisingrefinancingcyclefor trust financing (mainly used for land acquisitions) inQ120.Figure 2: Land market seems to lead new starts by a quarter, and land transactions have slowed recently100%80%60%40%20%-20%-40%May-09 May-16 Ho

43、using new start (3mma YoY)Land sales 300 cities (3mma YoY)Source: NBS, UBSFigure 3: Falling land price premium since May 20190% of land price premium above base priceMay-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 S

44、ep-16 Jan-17 May-17 Sep-17 Jan-18 May-18 Sep-18 Jan-19 May-19Sep-19Tier1-2citiesLower-tier cities -SatellitecitiesLower-tier cities - Non-satellite citiesMay-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17

45、 May-17 Sep-17 Jan-18 May-18 Sep-18 Jan-19 May-19Sep-19Source: CREIS, UBSFigure 4: Rising number of failed land auctions806040200Number of failed residential land auctions in 300 cities14%12%10%8%6%4%2%0%Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jan-0

46、5 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19Jul-19Source: CREIS, UBSFigure 5: Rising maturity cycle for trust financing in Q120(Rmb bn) 400Our esti

47、mate of maturity profile of trust products until 20211Q122Q121Q122Q123Q124Q121Q132Q133Q134Q131Q142Q143Q144Q141Q152Q153Q154Q151Q162Q163Q164Q161Q172Q173Q174Q171Q182Q183Q184Q181Q192Q193Q194Q191Q202Q203Q204Q201Q21Source: Yanglee, UBSB: national property sale GFA (two quarter lead): transactions picked u

48、p inQ319,butsell-throughratefalling.Q319nationalresidentialGFAsoldgrew by 5% YoY (vs -1% YoY in both Q219 and Q119). We note the pick-up in sales wasmainlyduetohigherprojectlaunchesinsteadofapick-upinthesell-through rate, as the rate fell in Q319 vs Q219, and developers are accelerating project laun

49、ches to increase sales proceeds due to credit tightening. Going into October 2019, the sell-through rate declined further due to rising inventory and project launches.ThisissimilartowhatwesawduringourfieldtriptoNanjingandnearby citieson24October2019.Assumingnopolicyeasing,weexpectQ419salesYoY will s

50、tart to slow due to the falling sell-through rate, and slower land transactions since Q319 should start to slow down projectlaunches.Figure 6: Property sales picked up in Q319100%80%60%40%20%-20%Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11

51、Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 May-18 Sep-18 Jan-19 May-19 Sep-19Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13

52、May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 May-18 Sep-18 Jan-19 May-19 Sep-19Housing new start(3mmaYoY)Property sales GFA (3mma YoY)Source: NBS, CREIS, UBSFigure 7: However, the sell-through rate deteriorated since Oct-2019(Units) 30,0005

53、,000-Weekly residential launches and sell-through rate in 10 cities90%85%80%75%70%65%60%55%Jan-17 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jan-17 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18

54、 Nov-18 Dec-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19Newlylaunchedunits(LHS)Sell-through rate (rolling4weeks,)15-Sep-1922-Sep-1929-Sep-196-Oct-1913-Oct-1920-Oct-19Weekly new launch (units)9,56320,86419,1717,43510,3139,190Sell-through rate74%71%63%42%55%55%Source

55、: CREIS, UBSMid-term conclusion for residential new startsWe estimate national residential GFA new starts to grow 7%/-3%/-1% in2019/20/21.BasedonUBSEvidenceLabsinteractivemodel,weforecastQ419 new starts to slow to 1% YoY. Assuming policy is unchanged, the falling sell- through rate and cooling land

56、market should result in slowing property sales and newstartsin2020E.WeforecastpropertysalesGFAtobealmostflatin2019(vs+1% in 9M19), and -2% in 2020 due to the falling sell-through rate since October 2019.Onthebackofslowingsales,weforecastnewstartsin2020willfallby3%.A mild slowdown due to lower invent

57、ory. Due to destocking from January 2016 to late 2018, the current absolute level of inventory in the pipeline (calculatedascumulativefloorspacestartedminuscumulativefloorspacesold)is 2.6bn sqm, 12% below the level in mid-2015. In terms of inventory months, it is around 21 months, still much lower t

58、han the 33 months in mid-2015. Inventory in the system is lower than in the last two downcycles. As such, we expect the constructionnewstartcycletomildlyslow,unlikethesharpdeclinein2014-15.Figure 8: Inventory in the pipeline is 12% lower than last peak cycle due to destocking in 2016-18National new

59、starts, sales area, and cumulative inventorySector wasadding stockSector Inventory down12% from peakmsqmmSector wasadding stockSector Inventory down12% from peak2,0003,5003,0002,5002,0001,5001,000500Jan-05 Jul-05 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan

60、-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19Inventoryinthepipeline(RHS)Completion (T12M, LHS)Newstarts(T12M,LHS)Sales area (T12M,LHS)Source: CEIC, UBSFigure 9: Current inventory is around 21 months, still much lower than t