skunk.works : Angan Steel
Angang Steel (347, $24.05) 6M Target $33.0 Trading BUY
Even though steel industry in China is facing inflating cost pressure, we believe Angang is the best defender among its peers, as 1) 70% of its iron ore are provided by its parent Angang Holdings that are priced based on the average market price in the preceding half-year, thus create a 6-month lag; 2) Company focuses on producing high quality and high value-added specialized steel and thus is able to charge its products at premium prices; 3) Technological advancement enables it to produce in a more efficient way against its peers.
Company enjoys a relatively high gross profit margin in 1-3Q07 when compared to its peers (Angang- 27%, Baosteel- 15%, Chongqing Iron & Steel-11%, Maanshan Iron & Steel- 10%).
Company currently has an annual production capacity of 15mn tonne, and with the completion of Bayuquan project next year, the capacity is expected to increase by another 5mn tonne in 2009. The new products from Bayuquan project are heavy plates which will mainly be used for shipbuilding and automobile manufacturing.
Share price has dropped 14.5% after the company announced an 18% yoy drop in third quarter earnings on October 31, and was retreated by more than 38% since reaching new high in mid-October. 9-day RSI stands at 28. We believe the stock is set to be oversold and thus provide a good buying opportunity.
The counter is trading at PER of 15x in 2007 and 13x in 2008, with a two-year EPS CAGR of 22% between 2006-2008 that we think is undemanding.
We maintain our BUY recommendation with a 6-month target price at $33.0, representing a 21.5x and 18x 2007 and 2008 PERs.