20140124-Maybank_KERPL-Lowering_EPS_and_target_price_12页_532kb

报告摘要

Angang Steel (347 HK) Summary

Core Content

Angang Steel is a Hong Kong-listed company in the materials sector with a current share price of HKD5.23 and a revised target price of HKD4.00, representing a 24% downside. The company's market capitalization is HKD37.8B, and its average daily trading volume (ADTV) is USD9M.

Main Views

Reiterated SELL Rating: Despite returning to profitability in 2013, the company's future earnings and cash flows do not justify the current share price. The analysis suggests that the company remains under pressure due to weak steel prices and slowing demand growth.
EPS and Target Price Cut: The 2013–2015E EPS forecasts have been reduced by 23–30% due to weak profitability, downward revisions in steel price and sales volume forecasts, partially offset by lower input costs. The target price has been cut from HKD4.25 to HKD4.00 based on a discounted cash flow (DCF) valuation.
Valuation Metrics: The target price corresponds to a PBR of 0.5x and an EV/EBITDA of 4.5x, based on 2014 estimates. These ratios are unchanged from previous estimates, indicating continued valuation pressure.
Profitability Trends: The company's profitability has been weak, with core net profit for 2013 at CNY769.7M and a core EPS of CNY0.11, below the previous forecast. ROE is forecasted to be 1.6–2.4% for 2014–2015, down from earlier estimates of 2.3–3.5%.
Steel Price and Demand Outlook: Steel prices in China have been declining since mid-2011, and this trend is expected to continue. The company's steel sales volume is forecasted to grow by 5% in 2014 and 2.5% in 2015, which is lower than production growth. The competitive market and overcapacity are major concerns.
Working Capital and Debt: Angang remains working capital negative and cash-flow tight. The company has been using rising payables to fund short-term debt, but this has not improved the overall cash flow situation significantly. Net debt/equity is expected to remain around 37–38%.

Key Information

2013 Performance: Angang released a 'Positive 2013 profit alert' with a profit of CNY770M, an EPS of CNY0.106, which is below the consensus of CNY0.12 and the previous forecast of CNY0.14.
Forecast for 2014–2015: The company is expected to report a pre-tax profit increase in 2014 (CNY0.84B vs. CNY0.77B), but free cash flow is expected to decrease due to lower operating cash flow and working capital drain.
Capacity and Demand: China's steel industry is expected to see slower growth in both production and capacity. The forecast for crude steel production growth is 3–4% annually, while capacity growth is 2% annually. The industry's operating rate is expected to improve from 80% in 2013E to 84% in 2017E.
Market Share and Pricing Power: The risk of consolidation without capacity elimination means that market share and pricing power improvements are unlikely in the short term. The competitive environment and overcapacity continue to limit profit margins.
Industry Trends: The steel market is affected by tight credit conditions, slowing construction growth, and low barriers to entry, particularly in flat steel. This is leading to increased capacity additions and suppressed price volatility.

Key Catalysts

Mixed news flow is expected, with some positive and some negative developments.
Moderate seasonal steel price upside may occur after the CNY holiday, but tight credit conditions are expected to limit price volatility.
Continued pollution control measures may not be sustained, and capacity additions are likely to continue.
The competitive nature of the steel market and overcapacity will likely keep steel prices under pressure.

Financial Highlights

Metric	FY11A	FY12A	FY13E	FY14E	FY15E
Sales (CNY m)	90,423.0	77,748.0	73,423.4	72,443.3	72,033.8
EBITDA (CNY m)	6,015.0	3,265.0	8,883.1	9,263.8	9,768.4
Core Net Profit (CNY m)	(2,146.0)	(4,157.0)	769.7	836.1	1,204.5
Core EPS (CNY)	(0.30)	(0.57)	0.11	0.12	0.17
Net Dividend Yield (%)	0.0	0.0	0.0	1.4	2.0
Core P/E (x)	nm	nm	38.3	35.3	24.5
P/BV (x)	0.6	0.6	0.6	0.6	0.6
EV/EBITDA (x)	10.0	19.5	5.5	5.3	5.1
Net Debt/Equity (%)	50.5	62.1	37.0	37.6	38.1

Key Ratios and Trends

ROE: Forecasted to be 1.6–2.4% for 2014–2015, down from previous estimates.
ROAA: Expected to be 0.8–1.3% for 2014–2015.
Free Cash Flow: Expected to decrease in 2014 compared to 2013, despite a slight increase in pre-tax profit.
Working Capital: Angang has used payables to fund short-term debt and reduce working capital deficit, but this has not improved the overall cash flow position significantly.

Conclusion

The company is expected to continue facing challenges due to weak steel prices, overcapacity, and slowing demand growth. While there is a slight improvement in profitability, it remains below historical levels, and the valuation suggests further downside potential. The SELL rating is reiterated, with a target price of HKD4.00.

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