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Angang Steel (347 HK) Summary

Core Content

Angang Steel (347 HK) is a Chinese steel company with a current share price of HKD4.86 and a target price of HKD4.00, indicating a 18% downside. The company has a market capitalization of HKD35.2B and an average daily trading volume of USD4M. The report reiterates a SELL recommendation due to weak earnings and a lack of seasonal recovery in the steel market.

Main Viewpoints

• Earnings Outlook:

  • 1Q14 EPS was CNY0.04, down 47% YoY due to lower steel prices.
  • The company's 2014 EPS estimate remains at CNY0.12, which is 20% below consensus.
  • 2H14 EPS is forecasted to be CNY0.05, down from CNY0.07E, suggesting a decline in profitability.

• Industry Outlook:

  • Chinese steel market prices have stabilized at low levels, but the company's list prices are considered inflated compared to market prices.
  • Crude steel production has increased significantly from December lows, reaching record levels in April, which has led to continued oversupply and weak demand.
  • The industry is expected to see slow growth in production and consumption at about 3% per year, with capacity reduction targets being moderate at 1.5% annually.

• Financial Performance:

  • Revenue for FY14E is expected to be CNY74,685.2M, down from FY13A's CNY75,329.0M.
  • Gross profit fell 23% YoY in 1Q14, while COGS decreased only slightly.
  • Adjustments in accounting practices led to a more accurate portrayal of cost trends, with gross profit down 5% YoY.
  • EBITDA and EBIT are projected to grow in FY14E, but profitability remains weak.

• Valuation Metrics:

  • The core P/E ratio for FY14E is 23.0x, while the reported P/E is 32.6x.
  • PBR is at 0.6x, and the net dividend yield is expected to increase from 0.7% in FY13A to 1.4% in FY16E.
  • EV/EBITDA ratio is projected to decline from 18.2x in FY12A to 5.1x in FY16E, indicating potential undervaluation.

• Cost Pressures:

  • The depreciation of the Yuan has increased imported iron ore costs, which could negate any positive effects from steel price increases.
  • Coking coal prices have been weak, providing some cost relief, but this is expected to be offset by higher iron ore costs in Q2.

Key Information

• Share Price Performance:

  • 1-month return: 2.7%
  • 3-month return: -5.4%
  • 12-month return: 2.3%
  • Relative to index: 0.5%, -4.5%, 3.1%

• Catalysts:

  • Continued oversupply and weak demand in the steel market.
  • Weak steel prices and stable volumes causing revenue declines.
  • Increased costs due to Yuan depreciation affecting imported iron ore.

• Liquidity and Leverage:

  • Net debt/equity is expected to rise from 35% in FY13A to 46.3% in FY16E.
  • Cash flow from operations is projected to decrease, indicating potential liquidity challenges.

• Profitability Trends:

  • Net margin is forecasted to decline from 2.8% in FY13A to 1.6% in FY14E.
  • ROAE and ROAA are expected to remain weak, at 1.8% and 0.9% in FY14E respectively.

• Market Position:

  • The company is facing challenges due to a lack of strong seasonal recovery.
  • There is a widening gap between company list prices and market prices, suggesting the need for price cuts or discounts to remain competitive.

Key Tables

Earnings Forecast

Valuation Metrics

Shareholder Data

Conclusion

Angang Steel is underperforming in a weak steel market with low profitability and inflated list prices. The company is expected to continue facing challenges due to oversupply, weak demand, and increased costs from Yuan depreciation. Despite some cost relief from weak coking coal prices, the overall outlook remains negative, with a SELL recommendation reiterated due to the current valuation and earnings forecast.