20180831-高盛-马鞍山钢铁股份-00323.HK-Earnings_Review__1H18A_above_expectation,_driven_by_lower_tax_rate_and_other_income_9页_658kb

Maanshan Iron & Steel (0323.HK) Summary

Core Content

Maanshan Iron & Steel (0323.HK) reported strong first-half 2018 results, with net profit (NP) reaching Rmb3.429bn, or Rmb0.445 per share (EPS), representing a 109% year-over-year (YoY) increase. Excluding one-time gains and losses, recurring NP was Rmb3.126bn, up 96% YoY and 36% above expectations, driven by a lower effective tax rate and higher other income. However, this was partially offset by lower steel margins than expected.

Key Financial Highlights

• Net Profit: Rmb3.429bn for 1H18A, up 109% YoY
• Recurring Net Profit: Rmb3.126bn, up 96% YoY and 36% above expectations
• EPS: Rmb0.445, up 109% YoY
• Recurring EPS: Rmb0.406, up 96% YoY and 36% above expectations
• Effective Tax Rate: 8%, lower than expected
• Operating Cash Flow (OCF): Nearly tripled to Rmb4.2bn
• Net Gearing: Improved to 39% from 48% in 2017A
• Free Cash Flow (FCF): Increased significantly, reflecting improved cash generation
• Price Targets:
  • 12-month target price for 0323.HK: HK$5.40 (upside of 30.8% from current price)
  • 12-month target price for 600808.SS: Rmb6.10 (upside of 55.2%)

Performance and Growth

• Revenue Growth:
  • 2018E: 9.9%
  • 2019E: (0.5)%
  • 2020E: (2.1)%
• EBITDA Growth:
  • 2018E: 13.9%
  • 2019E: 0.4%
  • 2020E: (3.3)%
• EBIT Margin: Stabilized around 9.1% for 2018E and slightly improved in 2019E
• EBITDA Margin: Increased to 14.2% in 2018E
• Net Income Margin: Improved to 7.0% in 2018E
• CROCI (Return on Capital Employed): Increased to 12.4% in 2018E

Valuation Metrics

Risk Factors

• Steel Prices: Dependent on industry supply-demand balance; long steel margins may underperform flat steel
• Government Policies: Export-related taxes and other regulatory changes could impact performance
• Raw Material Costs: Pressure from iron ore, coal, and other inputs
• Railway Expansion: May affect the rail wheel market and Maanshan's earnings

Outlook and Recommendations

Goldman Sachs maintains a Buy rating on Maanshan (A/H), citing the potential for a re-rating of equities due to:

• Structurally higher profit margins
• Longer duration and lower volatility
• Stretched capacity utilization and higher cost EAF production

They expect:

• Unit EBITDA for 2018E to be Rmb618/t and for 2019E to be Rmb623/t
• Unit GP for 2018E to be Rmb564/t and for 2019E to be Rmb570/t

Key Assumptions and Financials

• Spot-HRC: Rmb3,574/t for 2018E
• Spot-CRC: Rmb3,925/t for 2018E
• Spot-Rebar: Rmb3,392/t for 2018E
• Iron Ore China CIF: Rmb431/t for 2018E
• Sales Volume: Expected to remain stable, with flat products up 2% YoY and long products down 2% YoY
• Unit Gross Profit: Rmb546/t for 1H18A, up YoY but 10% below expectations

Cash Flow and Balance Sheet

• Operating Cash Flow: Rmb4.2bn for 1H18A, up 186% YoY
• Free Cash Flow: Rmb2,214bn for 1H18A, up 341% YoY
• Net Debt: Decreased to Rmb10,124bn
• Net Gearing: Improved to 39% from 48%

Conclusion

Maanshan Iron & Steel has demonstrated strong earnings performance in 1H18A, driven by lower tax rates and higher other income. Despite lower steel margins than expected, the company's improved financial metrics and reduced leverage suggest a positive outlook. Goldman Sachs continues to maintain a Buy rating, with updated price targets reflecting improved fundamentals and expectations for future performance. The company is expected to deliver strong unit EBITDA and GP in 2018E and 2019E, and its valuation metrics indicate potential for re-rating. Key risks remain, including steel price volatility, government policies, and raw material costs.