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China Steel (2002 TT, NT$25.55, N): Downgrade to Neutral




KGI Greater China


22 Apr 2014





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Oversupply weighs on prices China Steel posted preliminary 1Q14 sales of NT$92.4bn, operating profit of NT$4.73bn, and pretax income of NT$5.07bn; we estimate EPS of NT$0.23; despite shipments of 2.37mn mt vs. our estimate of 2.25mn mt, operating profit missed by 6.5% due to higher cost associated with No.4 furnace annual maintenance; net income beat by 1.6% on cash dividend from overseas investment While major Chinese steelmakers raised daily output by 5% in early April in response to street expectation for peak seasonality, industry-wide oversupply persisted with low-end sentiment to build inventory; company quotes flattish in June and up a minimal 0.37% in 2Q14 vs. our forecast of 4.8%; 2Q14 earnings will disappoint Given ineffective elimination of outmoded capacity in China, overcapacity will likely weigh on steel prices and the company’s bottom line despite an industry recovery; we cut our 12M target price from NT$30 to NT$25.5 (1.3x our end-2014F BVPS) on dim outlook for 2014-15; downgrade to Neutral Shares are trading at 1.3x our end-2014F BVPS, slightly lower than the historical average of 1.5x. Despite a sector recovery, we don’t expect China’s move to eliminate outmoded capacity to take effect soon given persistent oversupply of crude steel. Considering upcoming slow seasonality in 3Q14, we downgrade this counter to Neutral with a 12M target price of NT$25.5 (NT$30 previously), or 1.3x our end-2014F BVPS.

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