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SECTOR REPORT
BNPP RECOMMENDATIONS
EQUITIES RESEARCH Target Upside /
Company BBG Code Rating Share Price
Price Downside
CHINA Maanshan Steel
Angang Steel
323 HK
347 HK
BUY
BUY
2.35
5.40
3.57
7.12
+51.7%
+31.8%
CHINA STEEL
IMPROVING
INDUSTRY OUTLOOK
Attractive valuations TOP STOCK PICK
Company Angang Steel
SUMMARY BBG Code 347 HK
Weak 2011 steel results were no surprise Share Price 5.40
Angang and Magang reported weak 2011 earnings, in line with market Target Price 7.12
sector.
and BNPP expectations after a tough 4Q11 for the sector Angang reported 1 Year - high 11.28
.15b:
a net loss of RMB2.15b: Magang was marginally profitable with earnings
1 year - low 3.50
RMB69.6m. We do not
of RMB189m and attributable earnings of just RMB69
expect a strong rebound for steel, but believe the worst is behind us. Mar-11 Jun-11 Sep-11 Dec-11 Mar-12
12
9
OUTLOOK 10 (1)
Oversupply still the key issue, but sector seems to have bottomed 8
(11)
(21)
We see little progress on capacity rationalisation, despite slower earnings 6 (31)
growth for the sector. However, we note that product prices have 4
(41)
(51)
ed
stabilised and some product categories have begun to improve. Iron Iron-ore 2 (61)
prices have also stabilised, so we believe that any strength in domestic (HKD) Angang Steel Rel to MSCI China (%)
demand will lift steel prices and return larger mills to profitability.
VALUATION VALUATION SUMMARY
P/BV of 0.5x prices in 4Q11 performance; we prefer Angang Company P/BV (x) Yld (%)
Angang is trading at 0.57x 2012E P/BV and Magang at 0.51x, testing their FY12E FY13E FY12E
lows of past eight years. Our target prices of HKDD7.12 for Angang and Angang Steel 0.6 0.6 1.1
HKD3.57 for Magang are based on their respective long-term P/BV
Maanshan Steel 0.5 0.5 1.4
.
multiples of 0.94x and 0.98x. Despite the weak sector outlook, we are
Source: BNP Paribas estimates
BUYers of Angang and Magang based on their very low valuations, but we
prefer Angang due to: 1) the better demand outlook for non-construction
ore parent,
steel; and 2) potential renegotiation of iron-ore contract with its parent
which we believe will bring a significant reduction in the realised iron-ore
price for the listed company.
Given the fundamental problems with oversupply, lack of pricing power,
and questions surrounding the pace of investment growth in China, we do
not expect a robust recovery for the sector. However, with prices and
ing
market demand stabilising and inventories showing the first signs of
.
improvement, downside risks seem limited. We remain positive on the
look
outlook for equity performance of cyclicals in Asia.
James Clarke Rachel Cheung
james.clarke@asia.bnpparibas.com rachel.cheung@asia.bnpparibas.com
+852 2825 1178 +852 2825 1824
http://eqresearch.bnpparibas.com/index.
BNP Paribas Securities (Asia) Ltd. research is available on Thomson One, Bloomberg, TheMarkets.com, Factset and on http://eqresearch.bnpparibas.com/index Please contact
your salesperson for authorisation. Please see the important notice on the back page.
PREPARED BY BNP PARIBAS SECURITIES ASIA
THIS MATERIAL HAS BEEN APPROVED FOR U.S DISTRIBUTION. IMPORTANT DISCLOSURES CAN BE FOUND IN THE DISCLOSURES APPEND
IM NDIX 5 APRIL 2012
China Steel James Clarke
Poor performance no surprise, but coming off the bottom
Attractive valuation: Angang at 0.57x 2012E P/BV, Magang at 0.51x 2012E P/BV
Angang at 0.57x P/BV and Magang at 0.51x P/BV are trading near their eight-year lows, even as the worst
quarter since 4Q08 has passed, providing an attractive entry point to look for a short-term rebound, in our
view. We recommend 0.70-0.94x P/BV as an appropriate trading range for Angang and 0.65-0.98x P/BV
trading range for Magang. We are seeing signs of flat product demand recovery ahead of long products, and
prefer Angang to Magang.
EXHIBIT 1: Angang P/BV band chart EXHIBIT 2: Magang P/BV band chart
(x) (x)
4.5 3.0
4.0
2.5
3.5
3.0 2.0
2.5
1.5
2.0 +1SD
+1SD
1.5 Average
Average 1.0
(From 2004)
1.0 (From 2004 -1SD
0.5
0.5 -1SD
0.0 0.0
Jan-04 May-05 Sep-06 Jan-08 May-09 Sep-10 Jan-12 Jan-04 May-05 Sep-06 Jan-08 May-09 Sep-10 Jan-12
Sources: Bloomberg; BNP Paribas Sources: Bloomberg; BNP Paribas
HRC prices ticking up, inventories beginning to fall; rebar and CRC less attractive
HRC prices have shown steady improvement following a sharp decline in October 2011. CRC has been
relatively stable, while rebar has been the steady underperformer. The contrast in price performance
underlines our preference for flat products over longs, as we expect the rebound in construction activity to
be slower to materialise than manufacturing as well as more muted.
Steel inventories dropped in 4Q11 as small mills cut production and large mills moved maintenance
schedules into that quarter. Post CNY, with most steel mills resuming full production ahead of the pick-up
in demand, inventories again became an issue. Inventories for re-bar, HRC and CRC peaked at 8.495m
tonnes, 4.686m tonnes and 1.697m tonnes on 17 February, but have since begun to retreat.
Inventories have started to decrease, following the seasonal ramp-up in machinery, white goods and auto
demand. Rebar inventory in Shanghai, Beijing and Guangzhou rose sharply between December 2011 and
February 2012, but have also seen the biggest decline since late February. This rebar inventory trend shows
the bottoming out of construction steel demand.
EXHIBIT 3: Steel product cash profit margin trend by BNPP estimation
(RMB/tonne)
2,000
1,500
1,000
500
0
(500)
(1,000)
Feb-09 Jun-09 Oct-09 Feb-10 Jun-10 Oct-10 Feb-11 Jun-11 Oct-11 Feb-12
Sources: Bloomberg; BNP Paribas
2 BNP PARIBAS 5 APRIL 2012
China Steel James Clarke
EXHIBIT 4: China HRC price EXHIBIT 5: China HRC inventory
(RMB/tonne) ('000 tonnes)
7,000
5,000
4,800 6,000
4,600
5,000
4,400
4,200 4,000
4,000
3,000
3,800
3,600 2,000
3,400
1,000
3,200
3,000 0
Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Apr-06 Jun-07 Aug-08 Oct-09 Dec-10 Feb-12
Sources: Bloomberg; BNP Paribas Sources: Bloomberg; BNP Paribas
EXHIBIT 6: China CRC price EXHIBIT 7: China CRC inventory
(RMB/tonne) ('000 tonnes)
6,500 1,800
6,000
1,500
5,500
1,200
5,000
900
4,500
4,000 600
Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Apr-06 Jun-07 Aug-08 Oct-09 Dec-10 Feb-12
Sources: Bloomberg; BNP Paribas Sources: Bloomberg; BNP Paribas
EXHIBIT 8: China rebar price EXHIBIT 9: China rebar inventory
(RMB/tonne) ('000 tonnes)
6,000 9,000
8,000
5,500
7,000
5,000 6,000
5,000
4,500
4,000
4,000 3,000
2,000
3,500 1,000
0
3,000
Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Apr-06 Jun-07 Aug-08 Oct-09 Dec-10 Feb-12
Sources: Bloomberg; BNP Paribas Sources: Bloomberg; BNP Paribas
3 BNP PARIBAS 5 APRIL 2012
China Steel James Clarke
EXHIBIT 10: Shanghai, Beijing and Guangzhou rebar Inventory
('000 tonne)
2,300
2,100
1,900
1,700
1,500
1,300
1,100
900
700
500
300
Feb-08 Feb-09 Feb-10 Feb-11 Feb-12
Sources: CEIC; BNP Paribas
High iron-ore inventory and resumption of steel production
Following the 4Q11 sell-off, iron-ore prices have remained quite stable between RMB1,015/tonne and
RMB1,055/tonne, despite high inventory. The stable prices combined with high inventories support our view
that Chinese steel production growth remains positive.
EXHIBIT 11: China iron ore price EXHIBIT 12: China iron ore inventory
('000
(RMB/tonne) China - SH Rebar price (LHS) (USD/t) Inventory (LHS) Change (RHS)
tonnes) (y-y %)
6,000 China iron ore px (major ports) (RHS) 1,650 120,000 50
5,500 1,450
100,000 40
1,250
5,000 30
1,050 80,000
4,500
20
850
60,000
4,000
650 10
3,500 40,000
450 0
3,000 250 20,000 (10)
2,500 50
Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 0 (20)
Jul-06 Jun-07 May-08 Apr-09 Mar-10 Feb-11 Jan-12
Sources: Bloomberg; BNP Paribas Sources: Bloomberg; BNP Paribas
Daily crude steel production volume declined in 4Q11, as some private steel mills stopped production, but
these mills have mostly been restarted from November; large SOE steel mills completed maintenance
before CNY and are now back in production. After the holiday, steel production has rebounded, up 13% m-m
to 1.9m tonnes daily production in February. Historically, CEIC (using NBS numbers) reports significant
growth of steel production from 4Q to 1Q, due to underestimation of year-end production volumes (2M12
vs. November-December 2011: +10%). This has caused the discrepancy versus CISA’s more moderate
growth trend (2M12 vs. November-December 2011: 5.8%). We are forecasting steel production to grow 6%
y-y in 2012.
4 BNP PARIBAS 5 APRIL 2012
China Steel James Clarke
EXHIBIT 13: China average daily crude steel production EXHIBIT 14: China monthly crude steel production
(m tonnes) (tonnes)
2.1 70,000
1.98
1.97
1.95
1.94
1.93
1.92
1.91
2.0 60,000
1.9
1.87
1.85
1.83
1.9
1.81
50,000
1.80
1.79
1.77
1.73
1.8
1.71
40,000
1.69
1.68
1.67
1.67
1.67
1.66
1.62
1.7 30,000
1.60
1.67
1.6 20,000
1.5 10,000
1.4 0
Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 Jan-08 Sep-08 May-09 Jan-10 Sep-10 May-11 Jan-12
Sources: Mysteel; BNP Paribas Sources: CEIC; BNP Paribas
Despite the lack of a significant rebound in the sector year to date, the stabilisation of product prices and
the benign performance of iron-ore prices have allowed even the larger mills to return to profitability.
While in 1Q12 there is a risk of small losses for steel producers, we expect to see a sequential improvement
in their earnings in 2Q12 and 3Q12.
China PMI bottomed in March, suggesting a return of confidence. FAI picked up significantly in January and
February from 4Q11 lows, although it was still down y-y. While real estate investment remains subdued,
investment continues in other areas of the economy (underscoring our preference for flat products over
longs). The Ministry of Railways has announced a new RMB400b round of construction in 2H12, giving us
confidence big projects will continue. BNPP’s economics team forecasts FAI growth in 2012 will slow to
18.5%, from 23.8% in 2011, a more moderate pace than in previous years but still healthy.
EXHIBIT 15: China PMI bottomed in March EXHIBIT 16: China’s newly increased FAI and real estate FAI
(index) (%) Real estate development completion
65 80 Newly increased FAI
60 70
55 60
50
50
40
45
30
40 20
35 10
30 0
Apr-06 Feb-07 Dec-07 Oct-08 Aug-09 Jun-10 Apr-11 Feb-12 2009/02 2009/09 2010/04 2010/11 2011/06 2012/01
Sources: Bloomberg; BNP Paribas Sources: Winds; BNP Paribas
5 BNP PARIBAS 5 APRIL 2012
China Steel James Clarke
Company update
Angang (347 HK; BUY; CP: HKD5.40; TP: HKD7.12, 31.8% upside potential)
Angang turned in a net loss attributable to shareholders of RMB2.16b for 2011, down from a net profit of
RMB2.0b in 2010. This was in line with expectations, given the company’s profit warning earlier this year.
Gross profit was down 85.6% y-y, as turnover fell 2.1% y-y on lower production volumes (steel products
volume reached 19.2m tonnes, down 8.2% y-y) and falling prices in 4Q11. Production costs rose 4.4% on
higher iron-ore prices, which Angang endured through year-end due to the pricing arrangement with its
parent that prevented the company from enjoying the benefits of a falling spot iron-ore price.
The company adjusted depreciation schedules of fixed assets, in line with the announcement made in 4Q11.
This led to a RMB491m decrease in depreciation and RMB368m increase in net profit in the fourth quarter.
Angang was marginally profitable in 1H11 and marginally loss-making in 3Q11. The large losses were
accumulated in 4Q11, primarily due to the iron-ore contract with the parent that prices ore on a six-month
retrospective cycle. This contract is currently under review. Management has indicated its intention to
change the pricing tenor, with the goal to shift to a monthly schedule. Such a change would prevent this
type of mismatch between product prices and raw material costs in the future.
We expect Angang’s production volume to be flat in 2012. Gross margin was 1.0% in 2011, due to the
higher-than-expected realised iron ore import price (over USD200/tonne in 4Q11). In the absence of such
an unfavourable pricing scheme, we expect GPM to reach 6.5% in 2012 (vs. 7.1% in 2010; 1.0% in 2011).
EXHIBIT 17: Angang quarterly net profit
(RMB '000)
1Q 2Q 3Q 4Q
2,000
1,500
1,000
500
0
(500)
(1,000)
(1,500)
(2,000)
(2,500)
(3,000)
2007 2008 2009 2010 2011
Sources: Angang Steel; BNP Paribas
EXHIBIT 18: Angang 2011 financial results
Year-end 31 Dec 2010 2011 Change 2011 Consensus Actual vs. BBG
(RMB m) (RMB m) (y-y %) (RMB m) (%)
Revenue 92,212 90,207 (2) 95,413 (5)
Cost of sales (85,409) (89,158) 4
Sales related taxes (285) (169) (41)
Gross profit 6,518 880 (86)
Other operating profit 266 271 2
Distribution and other operating expenses (1,622) (1,549) (5)
Admin costs (1,844) (1,757) (5)
Finance costs (1,333) (1,540) 16
Jointly controlled entities and profits of associates 390 391 0
Operating profit 3,318 (2,155) (165) (321) 572
Pre-tax profit 2,378 (3,304) (239)
Income tax (413) 955 (331)
Net profit 1,965 (2,349) (220) 5,225 (145)
Minority income (89) (186) 109
Adjusted net profit 2,054 (2,163) (205)
Gross margin (%) 7.1 1.0
Net profit margin (%) 2.1 (2.6)
Sources: Angang Steel, Bloomberg consensus
6 BNP PARIBAS 5 APRIL 2012
China Steel James Clarke
Maanshan Steel (323 HK; BUY; CP: HKD2.35; TP: HKD3.57, 51.7% upside potential)
Magang’s 2011 net profit came in at RMB189.5m, down 84% y-y and in line with our forecast of
RMB193.3m. However, minority interest reached RMB119.9m (vs. RMB89.8m in 2010), which reduced the
income attributable to shareholders to RMB69.6m, down 93.9% y-y. The minority interest number makes
clear that the headquarters lost money in 2011, while the controlled subsidiaries and invested entities
made positive contributions. Contributing to the poor performance of Magang was the RMB674m charge for
price decreases for inventories, due to the sharp fall in both steel product and iron-ore prices.
Magang’s turnover of RMB86.6m was up 33.5% y-y. Its output of steel products reached 15.9m tonnes,
rising 8.3% y-y, but more important was the increased production of higher-value goods, including pipeline
steel, auto sheets, and wheels, which saw y-y increases of 90%, 11%, and 20% respectively. Unlike Angang,
Magang prices its iron on a monthly cycle; so it was able to benefit from the sharp fall in iron-ore prices in
4Q11 and has continued to benefit as prices have stabilised at lower levels.
Volume growth should continue, as the company incorporates Changjiang Steel (acquired in 2011).
Management guided that pig iron production would rise from 16.05m tonnes to 17.61m tonnes; crude steel
from 16.68m tonnes to 18.38m tonnes; steel products from 15.91m tonnes to 17.88m tonnes. This is slightly
higher than our expectations of 17.45m tonnes, 17.05m tonnes and 16.37m tonnes, respectively.
EXHIBIT 19: Magang's subsidiaries are profitable
Total Direct Total Pro rata
Company capital ownership Net profit Net profit MI
(RMB m) (%) (RMB m) (RMB m) (RMB m)
Ma steel (Hefei) iron & steel Co 500 71 224 159 65
Anhui Changjiang Steel Co 1200 55 55 30 25
Ma Steel International Trade and Economics Corp 50 100 (170) (170) -
Design & Research Institute of Maanshan Iron & Steel Co 100 0.6682 33 22 11
Anhui Masteel K. Wah New Building Materials Co 55 70 13 9 4
Ma Steel (Wuhu) Processing and Distribution Co 35 70 40 28 12
Ma Steel (Guangzhou) Processing & Distribution Co 120 67 19 13 6
Ma Steel (Jinhua) Processing & Distribution Co 120 75 13 10 3
Ma Steel (Yangzhou) Processing & Distribution Co 20 71 13 9 4
Anhui Masteel Holly Industries Co 30 71 32 23 9
Maanshan Iron and Steel (Australia) Proprietary 139 100 164 164 -
Maanshan Harbor Group Co 250 45 27 12 15
Maanshan BOC-Ma Steel Gases Co 468 50 174 87 87
Ma Steel (Hefei) Processing and Distribution Co 120 61 24 15 9
Sources: Maanshan Steel; BNP Paribas
Magang achieved 4.0% gross margin in 2011, beating our estimate of 2.9%. And we forecast it will be around
3.9% in 2012. Net profit margin in 2011 was 0.1%, well below our 0.3% estimation.
In 2012, Magang expects capex of RMB3.1b, mainly for maintenance, which will be well below 2011's
RMB5b level. There will be no dividend for 2011.
7 BNP PARIBAS 5 APRIL 2012
China Steel James Clarke
EXHIBIT 20: Magang quarterly net profit
(RMB '000)
Q1 Q2 Q3 Q4
2,000
1,500
1,000
500
0
(500)
(1,000)
(1,500)
(2,000)
(2,500)
(3,000)
2007 2008 2009 2010 2011
Sources: Maanshan Steel; BNP Paribas
EXHIBIT 21: Magang 2011 financial results
Year-end 31 Dec 2010 2011 2010 vs. 2011 2011 consensus Actual vs. BBG
(RMB m) (RMB m) (y-y %) (RMB m) (%)
Total turnover 64,981 86,842 34
Cost of sales (61,173) (83,364) 36
Gross profits 3,808 3,479 (9)
Sales tax and others (266) 513 (293)
Selling expenses (238) (286) 20
Administrative expenses (1,208) (1,291) 7
Finance expenses (732.4) (989.6) 35
Other investment income or loss 201.8 (526) (361)
Total operating expenses (2,243) (2,581) 15
Operating profit 1,565.4 158.3 (90) 1,121.0 (86)
Pre-tax profit 1,711.1 301.1 (82) 458.4 (34)
Income tax (520) (112) (79)
Net profit 1,191.6 189.5 (84)
Minority interests 90 120 34
Adjusted net profit 1,101.8 68.6 (94) 2,464.0 (97)
Gross margin (%) 5.9 4.0
Net profit margin (%) 1.7 0.1
2012 Management Expected
Production 2011 guidance growth
(m tonnes) (m tonnes) (%)
Pig iron 16.1 17.6 9.7
Crude steel 16.7 18.4 10.2
Steel products 15.9 17.8 11.8
- Steel plates 7.2
- Section steel 2.7
- Wire rods 5.8
- Train wheels and rims 0.2
Source: Maanshan Steel; Bloomberg consensus
8 BNP PARIBAS 5 APRIL 2012
China Steel James Clarke
Financial statements
Angang Steel
Profit and Loss (RMB m) Year Ending Dec 2009A 2010A 2011E 2012E 2013E
Revenue 70,057 92,212 91,283 91,235 89,302
Cost of sales ex depreciation (60,770) (79,953) (81,981) (79,119) (76,280)
Gross profit ex depreciation 9,287 12,259 9,301 12,116 13,022
Other operating income 82 182 0 0 0
Operating costs (2,620) (3,466) (3,474) (3,472) (3,398)
Operating EBITDA 6,749 8,975 5,827 8,644 9,624
Depreciation (5,134) (5,741) (5,774) (6,169) (6,604)
Goodwill amortisation 0 0 0 0 0
Operating EBIT 1,615 3,234 53 2,476 3,020
Net financing costs (919) (1,249) (1,559) (1,613) (1,619)
Associates 176 393 0 0 0
Recurring non operating income 0 0 (950) 0 0
Non recurring items 0 0 0 0 0
Profit before tax 872 2,378 (2,456) 863 1,401
Tax (165) (413) 416 (216) (350)
Profit after tax 707 1,965 (2,040) 647 1,051
Minority interests 41 89 (117) 29 48
Preferred dividends 0 0 0 0 0
Other items 0 0 0 0 0
Reported net profit 748 2,054 (2,157) 676 1,098
Non recurring items & goodwill (net) 0 0 0 0 0
Recurring net profit 748 2,054 (2,157) 676 1,098
Per share (RMB)
Recurring EPS * 0.10 0.28 (0.30) 0.09 0.15
Reported EPS 0.10 0.28 (0.30) 0.09 0.15
DPS 0.06 0.15 0.00 0.05 0.08
Growth
Revenue (%) (11.3) 31.6 (1.0) (0.1) (2.1)
Operating EBITDA (%) (26.6) 33.0 (35.1) 48.3 11.3
Operating EBIT (%) (63.8) 100.2 (98.4) 4,555.3 22.0
Recurring EPS (%) (75.0) 174.6 (205.0) (131.3) 62.4
Reported EPS (%) (75.0) 174.6 (205.0) (131.3) 62.4
Operating performance
Gross margin inc depreciation (%) 5.9 7.1 3.9 6.5 7.2
Operating EBITDA margin (%) 9.6 9.7 6.4 9.5 10.8
Operating EBIT margin (%) 2.3 3.5 0.1 2.7 3.4
Net margin (%) 1.1 2.2 (2.4) 0.7 1.2
Effective tax rate (%) 18.9 17.4 - 25.0 25.0
Dividend payout on recurring profit (%) 58.0 52.8 - 52.8 52.8
Interest cover (x) 1.9 2.9 (0.6) 1.5 1.9
Inventory days 63.2 54.3 58.2 60.0 61.5
Debtor days 18.6 17.8 19.4 19.3 19.5
Creditor days 43.7 36.8 42.2 43.6 44.0
Operating ROIC (%) 1.8 3.3 0.1 2.2 2.7
Operating ROIC - WACC (%) (7.8) (6.3) (9.6) (7.2) (6.7)
ROIC (%) 1.8 3.5 (0.9) 2.1 2.6
ROIC - WACC (%) (7.8) (6.1) (10.5) (7.3) (6.9)
ROE (%) 1.4 3.9 (4.1) 1.3 2.1
ROA (%) 1.5 2.8 (0.7) 1.8 2.1
*Pre exceptional, pre-goodwill and fully diluted
Revenue By Division (RMB m) 2009A 2010A 2011E 2012E 2013E
Flat products 57,746 75,977 74,548 74,160 72,690
Wire rods 2,589 3,031 4,365 4,296 4,140
Silicon Steel 3,082 6,032 6,317 6,776 6,557
Seamless steel pipes 1,479 1,308 1,844 1,890 1,824
Large steel sections 3,643 3,293 1,932 1,839 1,864
Others 1,517 2,570 2,551 2,550 2,496
Sources: Angang Steel; BNP Paribas estimates
9 BNP PARIBAS 5 APRIL 2012
China Steel James Clarke
Financial statements
Angang Steel
Cash Flow (RMB m) Year Ending Dec 2009A 2010A 2011E 2012E 2013E
Recurring net profit 748 2,054 (2,157) 676 1,098
Depreciation 5,134 5,741 5,774 6,169 6,604
Associates & minorities (217) (482) 117 (29) (48)
Other non-cash items (600) 934 934 934 934
Recurring cash flow 5,065 8,247 4,668 7,750 8,588
Change in working capital (3,653) (2,318) 756 (536) 79
Capex - maintenance (6,341) (2,500) (7,737) (7,500) (7,500)
Capex - new investment 0 0 0 0 0
Free cash flow to equity (4,929) 3,429 (2,313) (286) 1,168
Net acquisitions & disposals 0 0 0 0 0
Dividends paid (1,519) (434) (1,085) 0 (357)
Non recurring cash flows 1,294 (705) (1,099) (953) (934)
Net cash flow (5,154) 2,290 (4,497) (1,239) (124)
Equity finance 0 0 0 0 0
Debt finance 4,422 (881) 1,519 0 0
Movement in cash (732) 1,409 (2,978) (1,239) (124)
Per share (RMB)
Recurring cash flow per share 0.70 1.14 0.65 1.07 1.19
FCF to equity per share (0.68) 0.47 (0.32) (0.04) 0.16
Balance Sheet (RMB m) Year Ending Dec 2009A 2010A 2011E 2012E 2013E
Working capital assets 24,396 29,375 29,079 29,064 28,448
Working capital liabilities (16,465) (19,126) (19,586) (19,035) (18,499)
Net working capital 7,931 10,249 9,493 10,028 9,949
Tangible fixed assets 73,775 70,550 72,513 73,844 74,740
Operating invested capital 81,706 80,799 82,005 83,872 84,689
Goodwill 0 0 0 0 0
Other intangible assets 13 8 8 8 8
Investments 1,399 1,733 1,781 1,829 1,877
Other assets 1,429 1,802 1,802 1,802 1,802
Invested capital 84,547 84,342 85,596 87,511 88,376
Cash & equivalents (2,242) (3,651) (673) 566 690
Short term debt 21,363 19,356 19,356 19,356 19,356
Long term debt * 11,641 13,308 14,827 14,827 14,827
Net debt 30,762 29,013 33,510 34,749 34,873
Deferred tax 0 0 0 0 0
Other liabilities 0 0 0 0 0
Total equity 52,419 54,052 50,810 51,486 52,227
Minority interests 1,366 1,277 1,277 1,277 1,277
Invested capital 84,547 84,342 85,596 87,511 88,376
* includes convertibles and preferred stock which is being treated as debt
Per share (RMB)
Book value per share 7.25 7.47 7.02 7.12 7.22
Tangible book value per share 7.24 7.47 7.02 7.12 7.22
Financial strength
Net debt/equity (%) 57.2 52.4 64.3 65.9 65.2
Net debt/total assets (%) 29.8 27.1 31.7 32.8 32.8
Current ratio (x) 0.7 0.9 0.8 0.7 0.7
CF interest cover (x) (4.4) 3.7 (0.5) 0.8 1.7
Valuation 2009A 2010A 2011E 2012E 2013E
Recurring P/E (x) * 42.3 15.4 neg 46.8 28.8
Recurring P/E @ target price (x) * 55.7 20.3 neg 61.6 38.0
Reported P/E (x) 42.3 15.4 neg 46.8 28.8
Dividend yield (%) 1.4 3.4 0.0 1.1 1.8
P/CF (x) 6.2 3.8 6.8 4.1 3.7
P/FCF (x) (6.4) 9.2 (13.7) (110.6) 27.1
Price/book (x) 0.6 0.6 0.6 0.6 0.6
Price/tangible book (x) 0.6 0.6 0.6 0.6 0.6
EV/EBITDA (x) ** 8.6 6.7 13.2 7.8 7.0
EV/EBITDA @ target price (x) ** 9.0 7.0 13.7 8.1 7.3
EV/invested capital (x) 0.8 0.7 0.8 0.8 0.8
* Pre exceptional, pre-goodwill and fully diluted ** EBITDA includes associate income and recurring non-operating income
Sources: Angang Steel; BNP Paribas estimates
10 BNP PARIBAS 5 APRIL 2012
China Steel James Clarke
Financial statements
Maanshan Steel
Profit and Loss (RMB m) Year Ending Dec 2009A 2010A 2011E 2012E 2013E
Revenue 50,412 63,041 87,871 87,657 88,692
Cost of sales ex depreciation (42,854) (54,865) (80,312) (78,660) (78,803)
Gross profit ex depreciation 7,558 8,176 7,560 8,997 9,889
Other operating income 213 737 102 95 95
Operating costs (1,661) (1,754) (1,544) (1,540) (1,558)
Operating EBITDA 6,110 7,159 6,118 7,552 8,426
Depreciation (4,821) (4,811) (5,004) (5,537) (6,070)
Goodwill amortisation 0 0 0 0 0
Operating EBIT 1,289 2,348 1,114 2,015 2,357
Net financing costs (910) (842) (994) (1,172) (1,181)
Associates 68 83 0 0 0
Recurring non operating income 115 122 164 0 0
Non recurring items 0 0 0 0 0
Profit before tax 563 1,711 284 842 1,175
Tax (29) (520) (91) (211) (294)
Profit after tax 534 1,192 193 632 881
Minority interests (141) (90) 64 (47) (66)
Preferred dividends 0 0 0 0 0
Other items 0 0 0 0 0
Reported net profit 392 1,102 257 584 815
Non recurring items & goodwill (net) 0 0 0 0 0
Recurring net profit 392 1,102 257 584 815
Per share (RMB)
Recurring EPS * 0.05 0.14 0.03 0.08 0.11
Reported EPS 0.05 0.14 0.03 0.08 0.11
DPS 0.04 0.05 0.01 0.03 0.04
Growth
Revenue (%) (28.0) 25.1 39.4 (0.2) 1.2
Operating EBITDA (%) (11.4) 17.2 (14.5) 23.4 11.6
Operating EBIT (%) (44.7) 82.1 (52.5) 80.8 17.0
Recurring EPS (%) (48.1) 180.7 (76.6) 127.0 39.5
Reported EPS (%) (48.1) 180.7 (76.6) 127.0 39.5
Operating performance
Gross margin inc depreciation (%) 5.4 5.3 2.9 3.9 4.3
Operating EBITDA margin (%) 12.1 11.4 7.0 8.6 9.5
Operating EBIT margin (%) 2.6 3.7 1.3 2.3 2.7
Net margin (%) 0.8 1.7 0.3 0.7 0.9
Effective tax rate (%) 5.2 30.4 31.9 25.0 25.0
Dividend payout on recurring profit (%) 78.5 34.9 35.0 35.0 35.0
Interest cover (x) 1.6 3.0 1.3 1.7 2.0
Inventory days 78.9 70.4 67.0 79.6 79.8
Debtor days 25.8 42.6 47.1 54.9 54.5
Creditor days 86.4 75.0 58.9 69.9 70.1
Operating ROIC (%) 3.2 4.5 2.0 3.8 4.3
Operating ROIC - WACC (%) (7.2) (5.6) (8.1) (6.4) (5.9)
ROIC (%) 3.4 4.5 2.1 3.4 3.9
ROIC - WACC (%) (7.1) (5.6) (8.0) (6.8) (6.3)
ROE (%) 1.5 4.1 0.9 2.1 2.9
ROA (%) 2.1 2.5 1.1 1.8 2.1
*Pre exceptional, pre-goodwill and fully diluted
Revenue By Division (RMB m) 2009A 2010A 2011E 2012E 2013E
Flat products 23,533 31,560 34,588 33,342 31,023
Section steel 7,681 9,015 11,749 10,698 9,950
Wire rods 14,456 17,175 24,343 26,722 30,770
Train wheels 1,397 1,268 1,640 1,774 1,649
Others 3,345 4,023 15,551 15,121 15,300
Sources: Maanshan Steel; BNP Paribas estimates
11 BNP PARIBAS 5 APRIL 2012
China Steel James Clarke
Financial statements
Maanshan Steel
Cash Flow (RMB m) Year Ending Dec 2009A 2010A 2011E 2012E 2013E
Recurring net profit 392 1,102 257 584 815
Depreciation 4,821 4,811 5,004 5,537 6,070
Associates & minorities 73 7 (64) 47 66
Other non-cash items (3) (163) (163) (163) (163)
Recurring cash flow 5,283 5,756 5,034 6,005 6,788
Change in working capital 394 (2,565) (1,331) 12 (55)
Capex - maintenance 0 0 0 0 0
Capex - new investment (1,636) (2,091) (7,000) (7,000) (7,000)
Free cash flow to equity 4,041 1,099 (3,297) (983) (267)
Net acquisitions & disposals 0 0 0 0 0
Dividends paid (400) (503) (385) (90) (205)
Non recurring cash flows 183 (3,305) (2,087) 124 58
Net cash flow 3,825 (2,709) (5,768) (949) (414)
Equity finance 200 (16) 0 0 0
Debt finance (1,278) 406 6,392 0 0
Movement in cash 2,747 (2,318) 623 (949) (414)
Per share (RMB)
Recurring cash flow per share 0.69 0.75 0.65 0.78 0.88
FCF to equity per share 0.52 0.14 (0.43) (0.13) (0.03)
Balance Sheet (RMB m) Year Ending Dec 2009A 2010A 2011E 2012E 2013E
Working capital assets 15,491 24,422 33,876 33,794 34,188
Working capital liabilities (19,603) (25,969) (34,091) (34,021) (34,360)
Net working capital (4,112) (1,546) (215) (227) (171)
Tangible fixed assets 40,294 37,541 39,537 41,000 41,930
Operating invested capital 36,183 35,994 39,321 40,773 41,759
Goodwill 0 0 0 0 0
Other intangible assets 0 0 0 0 0
Investments 1,004 1,041 1,041 1,041 1,041
Other assets 2,635 2,357 3,286 3,278 3,316
Invested capital 39,822 39,393 43,648 45,092 46,116
Cash & equivalents (8,701) (6,384) (7,007) (6,058) (5,644)
Short term debt 1,989 3,488 5,125 5,125 5,125
Long term debt * 18,769 12,367 17,122 17,122 17,122
Net debt 12,057 9,471 15,239 16,189 16,603
Deferred tax 0 0 0 0 0
Other liabilities 0 0 0 0 0
Total equity 26,465 27,258 27,131 27,625 28,236
Minority interests 720 705 705 705 705
Invested capital 39,822 38,008 43,648 45,092 46,116
* includes convertibles and preferred stock which is being treated as debt
Per share (RMB)
Book value per share 3.44 3.54 3.52 3.59 3.67
Tangible book value per share 3.44 3.54 3.52 3.59 3.67
Financial strength
Net debt/equity (%) 44.4 33.9 54.7 57.1 57.4
Net debt/total assets (%) 17.7 13.2 18.0 19.0 19.3
Current ratio (x) 1.1 1.0 1.0 1.0 1.0
CF interest cover (x) 7.2 4.8 4.7 6.1 6.7
Valuation 2009A 2010A 2011E 2012E 2013E
Recurring P/E (x) * 37.3 13.3 56.9 25.1 18.0
Recurring P/E @ target price (x) * 56.7 20.2 86.4 38.1 27.3
Reported P/E (x) 37.3 13.3 56.9 25.1 18.0
Dividend yield (%) 2.1 2.6 0.6 1.4 1.9
P/CF (x) 2.8 2.5 2.9 2.4 2.2
P/FCF (x) 3.6 13.3 (4.4) (14.9) (54.8)
Price/book (x) 0.6 0.5 0.5 0.5 0.5
Price/tangible book (x) 0.6 0.5 0.5 0.5 0.5
EV/EBITDA (x) ** 4.7 3.5 4.4 4.1 3.8
EV/EBITDA @ target price (x) ** 5.3 4.2 5.0 4.6 4.2
EV/invested capital (x) 0.7 0.7 0.7 0.7 0.7
* Pre exceptional, pre-goodwill and fully diluted ** EBITDA includes associate income and recurring non-operating income
Sources: Maanshan Steel; BNP Paribas estimates
12 BNP PARIBAS 5 APRIL 2012
China Steel James Clarke
History of change in investment rating and/or target price
Angang Steel (347 HK)
Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Date Reco TP
2-Apr-08 REDUCE 13.80
22.60
11-Jan-09 HOLD 9.60
20-Aug-09 REDUCE 13.10
17.60
20-Jan-10 BUY 21.20
6-Mar-11 HOLD 10.20
12.60
6-Feb-12 BUY 7.12
7.60
2.60
(HKD) Angang Steel Target Price
james.clarke started covering this stock from 07-Feb-2012
Price and TP are in local currency
Valuation and risks: Key risks to our P/BV based target price are weaker steel demand in 2Q-3Q12, no improvement in China liquidity in 2Q-3Q12 will eliminate the trading
opportunity, lower than expected iron ore and coking price due to additional supply.
Sources: Bloomberg; BNP Paribas
Maanshan Steel (323 HK)
Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Date Reco TP
7.86
2-Apr-08 REDUCE 4.60
6.86 21-Apr-08 HOLD 4.30
5.86 20-Jan-10 BUY 7.20
6-Mar-11 HOLD 3.80
4.86
6-Feb-12 BUY 3.57
3.86
2.86
1.86
0.86
(HKD) Maanshan Steel Target Price
James.Clarke started covering this stock from 07-Feb-2012
Price and TP are in local currency
Valuation and risks: Key risks to our P/BV based target price are lower-than-expected GPM if steel price falls faster than iron ore price, weaker-than-expected steel demand in 2Q-
3Q12, and lower than expected iron ore/coking prices due to additional supply.
Sources: Bloomberg; BNP Paribas
13 BNP PARIBAS 5 APRIL 2012
China Steel James Clarke
Disclaimers and Disclosures
ANALYST(S) CERTIFICATION
James Clarke, BNP Paribas Securities (Asia) Ltd, +852 2825 1178, james.clarke@asia.bnpparibas.com.
Rachel Cheung, BNP Paribas Securities (Asia) Ltd, +852 2825 1824, rachel.cheung@asia.bnpparibas.com.
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Analysts mentioned in this disclaimer are employed by non-US affiliate of BNP Paribas Securities Corp., and is not registered/ qualified pursuant to NYSE
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14 BNP PARIBAS 5 APRIL 2012
China Steel James Clarke
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IMPORTANT DISCLOSURES
The disclosure column in the following table lists the important disclosures applicable to each company that has been rated and/or recommended in this
report:
Company Disclosure (as applicable)
Angang Steel 5
BNP Paribas represents that:
1. Within the past year, it has managed or co-managed a public offering for this company, for which it received fees.
2. It had an investment banking relationship with this company in the last 12 months.
3. It received compensation for investment banking services from this company in the last 12 months.
4. It beneficially owns 1% or more or the market capitalization of this company.
5. It makes a market in securities issued by this company.
6. The analyst(s) or an individual who assisted in the preparation of this report (or a member of his/her household) has a financial interest position in
securities issued by this company or derivatives thereof.
7. The analyst (or a member of his/her household) is an officer, director, or advisory board member of this company.
Additional Disclosures
Within the next three months, BNP Paribas may receive or seek compensation in connection with an investment banking relationship with one or more of
the companies referenced herein.
Target price history, stock price charts, valuation and risk details, and equity rating histories applicable to each company rated in this report is available in
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note or your BNP Paribas representative.
All share prices are as at market close on 3 April 2012 unless otherwise stated.
RECOMMENDATION STRUCTURE
Stock Ratings
Stock ratings are based on absolute upside or downside, which we define as (target price* - current price) / current price.
BUY (B). The upside is 10% or more.
HOLD (H). The upside or downside is less than 10%.
REDUCE (R). The downside is 10% or more.
Unless otherwise specified, these recommendations are set with a 12-month horizon. Thus, it is possible that future price volatility may cause a
temporary mismatch between upside/downside for a stock based on market price and the formal recommendation.
* In most cases, the target price will equal the analyst's assessment of the current fair value of the stock. However, if the analyst doesn't think the market will
reassess the stock over the specified time horizon due to a lack of events or catalysts, then the target price may differ from fair value. In most cases, therefore, our
recommendation is an assessment of the mismatch between current market price and our assessment of current fair value.
Industry Recommendations
Improving ( ): The analyst expects the fundamental conditions of the sector to be positive over the next 12 months.
Neutral ( ): The analyst expects the fundamental conditions of the sector to be maintained over the next 12 months.
Deteriorating ( ): The analyst expects the fundamental conditions of the sector to be negative over the next 12 months.
Country (Strategy) Recommendations
Overweight (O). Over the next 12 months, the analyst expects the market to score positively on two or more of the criteria used to determine
market recommendations: index returns relative to the regional benchmark, index sharpe ratio relative to the regional benchmark and index
returns relative to the market cost of equity.
Neutral (N). Over the next 12 months, the analyst expects the market to score positively on one of the criteria used to determine market
recommendations: index returns relative to the regional benchmark, index sharpe ratio relative to the regional benchmark and index returns
relative to the market cost of equity.
Underweight (U). Over the next 12 months, the analyst does not expect the market to score positively on any of the criteria used to determine
market recommendations: index returns relative to the regional benchmark, index sharpe ratio relative to the regional benchmark and index
returns relative to the market cost of equity.
RATING DISTRIBUTION (as at 4 April 2012)
Total BNP Paribas coverage universe 518 Investment Banking Relationship (%)
Buy 301 Buy 3.70
Hold 159 Hold 1.90
Reduce 58 Reduce 3.40
Should you require additional information concerning this report please contact the relevant BNP Paribas research team or the author(s) of this report.
© 2012 BNP Paribas Group
15 BNP PARIBAS 5 APRIL 2012
