Boosted by property cycle- turning
bullish on steel
Property sales recovery warrants an upgrade for the steel sector
________________________________________________________________________________________________________________
Deutsche Bank AG/Hong Kong
Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should
be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should
consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST
CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 072/04/2012.
James Kan
Research Analyst
(+852) 2203 6146
james.kan@db.com
Top picks
Angang Steel (0347.HK),HKD5.55 Buy
Maanshan Iron and Steel
(0323.HK),HKD2.31
Buy
China Steel (2002.TW),TWD27.75 Hold
Companies Featured
Angang Steel (0347.HK),HKD5.55 Buy
2011A 2012E 2013E
P/E (x) nm nm 34.4
EV/EBITDA (x) 16.4 54.6 10.8
Price/book (x) 0.7 0.7 0.7
Maanshan Iron and Steel
(0323.HK),HKD2.31
Buy
2011A 2012E 2013E
P/E (x) 303.1 nm 37.8
EV/EBITDA (x) 7.5 32.5 7.4
Price/book (x) 0.6 0.6 0.6
China Steel (2002.TW),TWD27.75 Hold
2011A 2012E 2013E
P/E (x) 23.4 77.6 27.9
EV/EBITDA (x) 11.0 13.7 10.8
Price/book (x) 1.5 1.5 1.4
TP change table
New TP Chg% Upside%
Angang (HKD) 7.3 23% 32%
Maanshan
(HKD)
3.4 50% 47%
China Steel
(TWD)
30.4 36% 10%
FY13E - DBe vs. Cons.
DBe Cons.DBe/Cons.
Angang (RMBm) 938 300 312%
Maanshan
(RMBm)
377 -199 NA
China Steel
(TWDm)
14,652 12,511 117%
This report changes ratings, target
prices, and estimates for several
companies under coverage. For a
detailed listing of these changes, see
tables above and pages 10-12.
We found property sales growth in China has led the crude steel production
cycle well for about 2-3 months. With an ongoing pick-up in property sales
growth, we see stronger steel production growth in 2013. We believe market
consensus of 4-5% steel demand growth in 2013 will likely be too low and
instead forecast 6.4% YoY growth. Together with capacity net additions
declining, we believe utilization rate improvement should be stronger than the
market expects. Also, we found the share price of steel names seems to track
well with steel production. We thus upgrade steel stock ratings: Angang from
Hold to Buy, Maanshan from Sell to Buy, and China Steel from Sell to Hold.
Property sales leading crude steel production indicating a good uptrend
Even though property demand only accounts for about one-third of overall
steel demand in China, we found that historically, monthly steel production
growth tracked well with the growth of monthly floor space sold (commodity
property sales). Property sales (floor space area) YoY growth normally leads
crude steel production YoY growth by about 2-3 months. Also, the previous
two property cycles (based on property sales YoY growth) had an average
duration of c.20+ months. As such, the current uptrend in property sales might
be indicating that steel production growth can accelerate in 2Q/3Q 2013. We
believe the property demand recovery should drive overall steel demand
growth up by 6.4% in 2013, higher than the market consensus of 4-5%.
Net capacity addition slowdown faster than we thought
Meanwhile, FAI into the ferrous metal smelting and pressing industry just
ended 2012 with negative 2% YoY growth. The slowdown in new capex is
faster than our expectation and could indicate a net capacity addition decline
into 2013 and potentially 2014. With stronger demand growth and slower net
capacity addition, we should be able to see decent utilization rate
improvement, from 80.9% in 2012 to 82.3%, similar to 2011. For 2014, we
expect the steel utilization rate to reach 84.2%, a similar level to that seen in
2010. Back in 2010, the industry average net margin was about 2.6% and the
ROE of Angang and Maanshan was about 4%.
Upgrading earnings forecasts and ratings for steel stocks; major risk: policies
We upgrade our 2013 earnings forecasts for Angang/Maanshan/China Steel.
Currently, our 2013 NPATs for Angang/China Steel are 210%/20% above
market consensus, and we believe Maanshan can make profit of RMB377m
while market consensus is for a net loss of RMB199m in 2013. For
Angang/Maanshan, ROAEs will be about 2% in 2013 and about 5% in 2014.
We believe the demand improvement will drive share prices up but we don’t
think they deserve their 2013 book values. We thus set their target PB multiple
at 0.9x, the historical average PBx of Maanshan. With target prices at
HK$7.3/HK$3.4 and upsides at 32%/47%, respectively, we upgrade Angang
(from Hold) and Maanshan (from Sell) to Buy. We prefer Maanshan over
Angang as Maanshan has more exposure to construction demand. For China
Steel, we adopt its long-term historical average PBx at 1.55x as the target
multiple and set the target price at NT$30.4. With 10% upside potential, we
upgrade China Steel from Sell to Hold. The major risk to our thesis is Chinese
government policies which endeavor to control inflation and property prices.