Maanshan Iron (0323-HK): Iron & Steel Industry Supported by Positive Factors
The HSCEI had missed ground at 9000 following seven days of declines in a row and closed at 8528 on Monday. In reality, the HSCEI has fallen nearly 20 per cent from the high in January, totally erasing the gain in the past three months. The most significant loser goes to banks of financial stocks that had good performance last year. With the index having sunk to the support level, investors are recommended to hunt bargains currently and collect after the stock markets level off.
Among various types of stocks, iron & steel stocks benefiting from such positive factors as a recent increase in steel price, revaluation of Renminbi and growing investment in fixed assets are worth noticing. Analyzed on the basis of supply and demand of the overall industry, steel output in the globe was 1,239.5 million tonnes in 2006, up 8.8 per cent from 2005, while the same in China had ranked the first in the world for the 11th consecutive years; China had broken 400 million tonnes in steel output last year, accounting for one third of the global output, and shifted from net import to net export. The market expects China will maintain an approximately 10 per cent economic growth in 2007 and enjoy a more than 20 per cent increase in fixed asset investment, with real estate investment poised to keep a rise of more than 18 per cent and an about 20 per cent hike in total value of imports & exports. As iron and steel are essential materials for infrastructure projects, the mounting fixed asset investment will be advantageous to the outlook of iron & steel companies.
Industry rectification good to big iron & steel companies
Excess production capacity is one of the major problems in the iron & steel sector. The iron & steel production capacity had been growing over the past years, adding to the domestic output mostly being inferior products and low prices adopted as a means of sales widely, which resulted into a vicious circle in the industry and undermined corporate profits. According to China Iron & Steel Association ("ClSA"), there were 14 loss-making enterprises out of the 83 medium and large iron smelters included into CISA's statistics in the first half of 2006. The Circular on Accelerating the Restructuring of Industries with Excess Production Capacity issued by the State Council last year is a turning point of the industry. Since then, the government has started actively controlling iron & steel capacity growth and weeding out unqualified enterprises. The industry integration will help large iron & steel companies share a large slice of the market and reduce malicious competition.
In the short term, iron prices rallying from low and Renminbi appreciation will help iron & steel companies enhance profits. The figures by China Customs showed the net exports of iron & steel were 29,000 tonnes in January this year, the first consecutive decline since last August, down 21 per cent from the last month. The decrease was mainly attributable to a closing of the iron & steel prices between the US and China. China's iron prices have unexpectedly risen, with the price of hot-rolled plates up over 9 per cent since last December. This reflects strong demand at home and demonstrates the fact that the impact of overseas countries taking protectionism action against the iron and steel from China will be temporary. Revaluation of Renminbi is advantageous to lower the sourcing costs for iron and steel industry. Around 40 per cent of iron ores depend on imports at present, while raw materials centering on iron ores make up 30 per cent to 40 per cent of steel cost. That enables domestic iron and steel industry and enterprises to take a series of measures including production capacity adjustment, merger and restructuring effectively without affecting economic benefits.
Maanshan Iron profits sensitive to iron prices
Maanshan Iron (0323-HK) (the "Company") principally engaged in production and sales of iron and steel products is one of the largest iron and steel producers and sellers in China. Its products are roughly divided into four categories, namely steel plates, section steel, bars and wheels. On wheel business side, it has to be mentioned that the Company is the second largest train wheel producer in the world and the first largest in Asia. China's investment in railways to reach RMB2,000 billion by 2020 during the period of the eleventh five-year plan will be favourable to business development of the Company as the standard setter for domestic wheel market.
Among several iron & steel stocks, the Company's profits are particularly sensitive to the change in iron & steel prices, and each 1 per cent change in price will lead to an 8 per cent change in its profit forecasts for 2008. While it is expected that China's iron & steel output will slow down in 2007 and 2008 and that domestic demand will sustain growth, spot iron & steel prices are believed to keep rising. The Company's new production capacity will be able to contribute 20,000 to 30,000 tonnes of sales in 2007, which, coupled with assistance of Baosteel, is believed to be capable of boosting prices of its products availably. Therefore, I foresee that new capacity can help improve its sales and profits.
According to its results for the third quarter last year, the Company's profit reached RMB607 million (based on Chinese accounting standards), representing a 5 per cent increase compared with the same period in 2005, mainly thanks to average selling prices more optimistic than expectations and robust sales. The company's sales arrived at 2.7 million tonnes in the third quarter, representing an 18 per cent increase compared with the same period in 2005 and a 13 per cent rise compared with the last quarter, making it seem to have hit its stride. The Company's share price is $4.27 currently, still standing above the 100-day Moving Average and representing a P/E ratio of 9.85 times. |
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