20181024-中国银河国际证券-马鞍山钢铁股份-00323.HK-Riding_on_Higher_Long_Product_Prices__Eye_on_Potential_ASP_Hike_4页_903kb

MAANSHAN IRON & STEEL (323.HK) Summary

Core Content

This document provides an analysis of Maanshan Iron & Steel (Magang), a state-owned steel manufacturer based in Anhui Province, China. The report outlines the Company's recent performance, market dynamics, and valuation, with a focus on its exposure to long steel products and potential for earnings growth.

Main Points

1. Share Price Performance and Earnings

• Magang's share price has increased by 20% since the last update in June 2018.
• Strong operating results and earnings upgrades by the Street have supported the price increase.
• The Company's net profit in 9M18 reached 86% of the FY18E consensus estimate.
• Q4 is expected to be a peak season for the Company, contributing over 38% of full-year profit in profitable years (2013–2017).

2. Steel Price Trends

• Long product prices in China have risen by 11.5% YoY, outperforming flat product prices (1.5% YoY).
• The Myspic index has increased by 1% since Q4, driven by tightening steel supply due to supply-side reforms and production suspensions in Tangshan.
• The Chinese government's plan to boost infrastructure investment is expected to increase demand for long products.

3. Potential for ASP Hike

• The report suggests a possibility for ASP (Average Selling Price) hike in Q4 2018 due to improving supply and demand dynamics and production restrictions in China.
• Tangshan government announced a 50% reduction in the use of sintering machines, shaft furnaces, and lime kilns, indicating a strong commitment to production control.
• Anhui government also plans off-peak production restrictions, which may have a limited impact on Magang due to the Company's prior expectations and planning.

4. Earnings and Cost Factors

• Gross margin is expected to remain stable at 16% in Q4 2018.
• Iron ore prices are unlikely to decline sharply in the near term due to resilient demand.
• Coking coal prices may retreat due to inventory pile-up in major Chinese ports, up by 16% since July.

5. Valuation

• Magang is currently trading at 1.06x PBR, slightly higher than the average of its HK-listed peers.
• The report believes the valuation is justified due to the Company's high earnings sensitivity to steel prices, high exposure to long products, and strong earnings growth (58% YoY in 2018E).
• Peer comparison shows that Magang's earnings growth is higher than that of Angang (28% YoY) and China Oriental Group (8% YoY).

6. Business Overview

• Magang is a state-owned enterprise with Magang Group holding 45.5% of the shares.
• The Company was listed in Hong Kong and Shanghai in 1993 and 1994, respectively.
• In 2017, Magang produced 18.6m tons of steel, with long products accounting for 48%, steel plates for 51%, and wheels and axles for 1%.

7. Utilization Rate and Growth Potential

• Magang's current utilization rate is c.85%–90%, suggesting room for volume growth in response to increased demand from infrastructure projects.

Key Figures

Metric	2016	2017	2018E	2019E
Revenue (m)	48,275	73,228	78,234	76,715
Gross profit (m)	5,286	8,931	12,267	12,382
Gross margin (%)	11	12	16	16
Net Profit (m)	1,229	4,129	6,511	6,145
Net Margin (%)	3	6	8	8
EPS	0.16	0.54	0.85	0.80
Dividend Yield (%)	0.0	5.4	7.0	7.0
PER (x)	24.0	7.1	4.6	4.9
PBR (x)	1.5	1.2	1.1	0.9

Conclusion

Magang is expected to benefit from rising long product prices and potential ASP hikes in Q4 2018. Its strong earnings growth and high exposure to long products justify its current valuation, despite being slightly higher than its HK-listed peers. The Company's operational resilience and strategic positioning make it a positive investment in the context of government-driven infrastructure stimulus and supply-side controls in the Chinese steel industry.