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Tung Ho Steel (2006 TT, NT$25.55, N): Downgrade to Neutral




KGI Greater China


14 May 2014





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Growth limited; China competition a risk 1Q14 sales were NT$8.36bn, gross margin 8.8%, and net income NT$432mn, for EPS of NT$0.44, below our forecast of NT$535mn as rebar price fell more than scrap steel cost, narrowing 1Q14 spread; the rebar-focused Guanyin plant suffered the biggest loss; 2Q14F sales at NT$9.01bn and net income at NT$456mn, up only 5.6% QoQ Tung Ho owes 51% & 46% of sales to H-beam & rebar, which feature gross margin of 11% & 8%; rebar margin fell in the past year due to competition; competition in Taiwan’s rebar market will intensify in 2H14 when China imports arrive Taiwan 2014 rebar demand outlook weak, China rebar imports adds to competition and uncertainty; target price cut from NT$33 to NT$27, or end-2014 P/B of 1.1x and PE of 15x; downgrade to Neutral Shares are trading at an end-2014F P/B of 1.05x, vs. the historical range of 0.9-1.5x. Target price cut from NT$33 to NT$27, or end-2014 P/B of 1.1x and PE of 15x. On limited core business growth from weaker rebar demand in Taiwan in 2014, increased competition and uncertainty from upcoming rebar imports, downgrade to Neutral.

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