20180828-高盛-宝钢股份-600019.SH-Earnings_Review__1H18_below_expectation_due_to_softer_improvement_in_CR_products_and_one-offs__remains_positive_on_post_results_conference_call_10页_633kb

Baoshan Iron & Steel (600019.SS) Summary

Core Content

Baoshan Iron & Steel (600019.SS) reported its 1H18 financial results, which showed a net profit (NP) of Rmb10.0bn and an EPS of Rmb0.449, representing a 62% year-over-year (yoy) increase. However, these results were below expectations due to softer improvements in cold-rolled (CR) products and one-time expenses, including a Rmb599mn foreign exchange loss and Rmb780mn provisions for severance. Excluding these one-offs, recurring NP was estimated at Rmb10.7bn, which was 8% below expectations but in line with the consensus (IBES).

Main Financial Highlights

Revenue

• 1H18: Rmb148,534mn
• 2018E: Rmb146,520mn (1% below actual)

Net Profit

• 1H18: Rmb10,009mn
• 2018E: Rmb11,619mn
• 2019E: Rmb23,375mn

EPS

• 1H18: Rmb0.449
• 2018E: Rmb0.522
• 2019E: Rmb1.05

Unit Gross Profit

• 1H18: Rmb790/t (up 27% yoy)
• 2018E: Rmb834/t
• 2019E: Rmb831/t

Unit SG&A

• 1H18: Rmb315/t (up 17% yoy)
• 2018E: Rmb255/t
• 2019E: Rmb296/t

Operating Cash Flow

• 1H18: Rmb19,469mn
• 2018E: Rmb22,150mn
• 2019E: Rmb42,177mn

Net Debt/Equity

• 12/17: 38.6%
• 12/18E: 24.0%
• 12/19E: 15.4%

Net Gearing

• 12/17: 41%
• 12/18E: 35%
• 12/19E: 30%

Free Cash Flow

• 1H18: Rmb17,120mn
• 2018E: Rmb30,170mn
• 2019E: Rmb25,177mn

Key Projects and Initiatives

• Zhanjiang Third Blast Furnace Project:
  • Capacity: 4.02mmt pig iron, 3.6mmt crude steel, 4.5mmt HRC, 1.66mmt CRC
  • Total Capex: Rmb18.85bn
  • Estimated IRR: 11.9%
  • Unit CAPEX: Rmb5200/t (higher than Phase 1-2 CAPEX of Rmb4700/t)
  • Capacity Replacement Policy: Approved by SASAC

Management Outlook

• Management remained positive about full-year targets and cost-saving synergy plans.
• 2Q18 unit gross profit declined by Rmb56/t QoQ, primarily due to:
  • Currency moves on US debt
  • Severance cost provisions
  • Environmental costs at Qingshan and Meishan bases
  • Higher raw material costs (coal, alloy, electrodes)
• Baosteel reiterated its Rmb10bn cost-saving plan for 2018, with Rmb3.6bn savings expected in 2019 and Rmb4.7bn in 2020.
• The company expects domestic auto demand to decelerate from 4% in 1H18 to 2% in 2018, but remains optimistic about the appliance and medium-heavy plate and steel pipe markets.

Investment View

• Goldman Sachs maintains a Buy rating on Baosteel.
• 12-month price target: Rmb13.50 (from Rmb13.8/share), based on updated P/B vs. ROE correlation.
• The company is expected to deliver unit EBITDA of Rmb901/t for 2018 and Rmb927/t for 2019.
• Revised down 2018E and 2019E earnings by 9% to reflect lower-than-expected HR/CR margins and higher R&D costs.

Key Risks

• Lower-than-expected steel prices due to industry supply-demand balance and auto market performance
• Industry capacity closure
• Government policies, especially export-related taxes
• Cost pressure from raw materials (iron ore, coal, etc.)

Valuation Metrics

Strategic Plans

• Baosteel aims to cap annual CAPEX at or below annual depreciation (Rmb18bn).
• Remaining cash will be used for dividend payout (50% or higher), deleveraging, potential acquisitions, and higher dividends.
• Strong cash flow generation supports these plans and is a key driver for the company’s financial stability.

Market Position

• Baosteel is positioned to benefit from stretched capacity utilization and higher-cost EAF production, which should reduce margin risk.
• The company is confident in its compliance with high environmental standards at the headquarters and Dongshan base, although it expects more work at Meishan and Qingshan bases.

Conclusion

Despite the below-expectation 1H18 results, Baosteel remains optimistic about its full-year performance and long-term strategic goals. The company is well-positioned to benefit from structural improvements in the steel sector and its strong cash flow generation supports its financial flexibility and growth initiatives. Goldman Sachs continues to recommend a Buy rating with a 12-month price target of Rmb13.50.