On Monday, JPMorgan downgraded shares of Angang Steel Company Limited (347:HK) (OTC: ANGGF) from Neutral to Underweight, adjusting the price target to HK$1.00 from the previous HK$1.90. The downgrade comes after the firm's analysis indicated a weaker-than-expected impact from policy measures on the steel industry.
The firm's assessment points to current property policies primarily aiming at stabilizing home prices rather than increasing construction activities, which would drive steel demand. This outlook is contrary to some investor expectations that policy easing might result in stronger support for the sector. Angang Steel's stock had risen 12% in two days, outperforming the Hang Seng Index's 3% gain following property easing announcements in mid-May.
JPMorgan notes that the medium-term policies in the steel sector are also focused on reducing excess capacity, not on raising steel prices. This perspective aligns with the firm's decision to lower earnings estimates for Angang Steel, forecasting the company's loss to widen to RMB 4 billion. This forecast contrasts with the consensus expectation, which anticipates a narrowing of the loss to RMB 1 billion.
The firm expresses a more bearish stance on the turnaround story for Angang Steel, anticipating further sell-offs. This expectation is supported by the observation of an expanding A/H premium, which has increased to an average of 89% over the past three months, compared to 78% as of June 21. The widening premium is seen as a potential indicator of market disappointment if policy impacts fail to meet investor expectations.
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