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Sentiment to improve as output cuts
take effect and steel prices stabilise
High costs, softer demand to challenge
3Q but medium-term outlook still robustSector oversold: POSCO top pick and
HSBC Asia Super 10 ideaSeasonally weaker 3Q season approaches but prices
bottoming. Underlying demand has remained resilient but
sentiment has been affected by Chinas property clampdown
and European debt concerns. In turn, inventory liquidation and
consumers sitting on their hands have pushed prices down. In
our view, these concerns have been overplayed and we believe
steel prices may soon stabilise given that prices are now below
the cost of marginal production, which should trigger supply
cuts over the coming months. Meanwhile inventories remain at
normal levels. Over the coming years, we stick to our view that
Asia should remain tightly balanced, shift into a net importer
position and operate at near full capacity. These conditions have
historically corresponded with higher profit margins.
3Q margin squeeze likely lowering 2010 forecasts. With
spot Asian HRC steel prices having corrected 12% (USD85/t)
since recent highs, 3Q has begun weaker than our expectations.
For 2010, we reduce steel price forecasts by 5%, leading to
average EPS downgrades of 13% in 2010 but largely maintain
2011 forecasts. Against consensus, our revisions place us 7%
below 2010 but 9% ahead of 2011 estimates.
Valuations below trend, now cheaper to buy than build. We
believethe market is pricing in an unlikely bearish scenario
with implied ROEs below historical trend, and regional
valuations (EV/t of USD931) are now below replacement cost
(USD1,036/t). We remain attracted to Indian names that offer
highest raw material self-sufficiency (SAIL is our top pick in
India). In our view, Chinese steel stocks are oversold.
Catalysts steel prices to bottom. We believe the key near-
term catalyst is a bottoming in steel prices. Upcoming 2Q
earnings should be solid but this is largely priced in; 3Q outlook
statements will likely be cautious given recent price cuts. This
should prove to be the bottom as we expect recovery in steel
prices in 4Q as cost pressures ease.
Global Natural Resources
Asia Metals & Mining
Asia Steel3Q to signal bottom
HSBC Asia Steel sector ratings and target prices
Company Code Ccy Last New Prev Potl Ratingprice TP TP rtn (unchg)
POSCO 005490 KRW 472,000 600,000 650,000 30% OW (V)Nippon Steel 5401 JPY 318 360 360 14% N (V)JFE Holdings 5411 JPY 2,986 3,350 3,600 15% N (V)Baosteel 600019 RMB 6.13 8.00 9.00 34% OW (V)Angang A 000898 RMB 7.76 9.50 11.50 26% OW (V)Angang H 347 HKD 9.91 12.00 15.00 25% OW (V)
Maanshan A 600808 RMB 3.46 4.50 5.50 33% OW (V)Maanshan H 323 HKD 3.53 4.50 6.00 31% OW (V)China Steel 2002 TWD 30.70 37.00 42.00 29% OW (V)SAIL SAIL INR 198 256 272 31% OW (V)Tata Steel TATA INR 486 562 690 17% N (V)JSW Steel JSTL INR 1057 1,280 1,460 22% OW (V)BlueScope BSL AUD 2.35 3.00 3.50 29% OW (V)
OW = Overweight, N = Neutral, UW = Underweight; V = Volatile (see disclosure appendix)Source: Bloomberg, HSBC. Prices as at close of 16 June 2010
18 June 2010
Daniel Kang *
Regional Head of Metals & Mining, Asia-Pacific
The Hongkong and Shanghai Banking Corporation Limited
+852 2996 6669 [email protected]
Jatin Kotian *
Analyst
HSBC Securities and Capital Markets (India) Private Limited
+9122 2268 1638 [email protected]
Sarah Mak *
Analyst
The Hongkong and Shanghai Banking Corporation Limited
+852 28224551 [email protected]
Lun Zhang*Analyst
The Hongkong and Shanghai Banking Corporation Limited
+852 2996 6569 [email protected]
Amit Pansari*, CFA
Associate, Bangalore
View HSBC Global Research at: http://www.research.hsbc.com*Employed by a non-US affiliate of HSBC Securities (USA) Inc,and is not registered/qualified pursuant to FINRA regulations
Issuer of report: The Hongkong and Shanghai BankingCorporation Limited
Disclaimer & DisclosuresThis report must be read with thedisclosures and the analyst certificationsin the Disclosure appendix, and with theDisclaimer, which forms part of it
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Valuation and key changesHSBC Asia Steel valuation summary (calendar year-end)
Stock Rating Ccy Share Target Mkt cap _____PE (x) _____ __ EV/EBITDA (x)__ ____ PB (x)______ ___ Div yield ____price price USDm 2010e 2011e 2010e 2011e 2010e 2011e 2010e 2011e
POSCO OW (V) KRW 472,000 600,000 29,002 7.3 5.8 4.5 3.2 1.0 0.9 2.7% 3.4%Nippon Steel N (V) JPY 318 360 23,620 19.5 10.4 9.6 7.4 1.1 1.0 1.1% 2.0%JFE Holdings N (V) JPY 2,986 3,350 20,020 11.6 8.4 7.2 6.1 1.0 0.9 2.0% 2.7%Baosteel OW (V) RMB 6.13 8.00 15,712 11.8 8.6 4.6 3.8 1.1 1.0 3.3% 5.2%Angang - A OW (V) RMB 7.76 9.50 6,984 13.0 6.6 6.8 4.5 1.0 0.9 3.9% 7.6%Angang - H OW (V) HKD 9.91 12.00 1,381 14.6 7.3 6.8 4.5 1.1 1.0 3.5% 6.8%Maanshan - A OW (V) RMB 3.46 4.50 3,022 10.9 6.8 3.9 2.9 0.9 0.8 3.2% 5.2%Maanshan - H OW (V) HKD 3.53 4.50 785 9.8 6.1 3.9 2.9 0.8 0.8 3.6% 5.8%China Steel OW (V) TWD 30.70 37.00 12,404 10.5 8.1 8.7 6.9 1.5 1.4 8.1% 10.6%
SAIL OW (V) INR 198 256 17,480 11.5 9.0 6.1 5.0 2.2 1.8 1.5% 1.6%Tata Steel N (V) INR 486 562 9,210 14.1 7.6 6.2 5.2 1.2 1.1 1.4% 2.4%JSW Steel OW (V) INR 1,057 1,280 4,228 11.5 7.9 8.0 5.8 1.9 1.6 1.2% 1.9%BlueScope OW (V) AUD 2.35 3.00 3,702 16.5 6.4 5.9 4.2 0.7 0.7 3.0% 8.1%Asia Steel Sector 147,549 12.3 8.0 6.6 5.1 1.2 1.1 2.7% 4.0%
Source: HSBC estimates; Prices as of close 16 June 2010, OW = Overweight, N = Neutral, UW = Underweight; V = Volatile (see disclosure appendix)
HSBC vs Consensus net profit estimates
Year end Code Unit _________ HSBC__________ __Bloomberg Consensus __ __ HSBC vs Consensus____2010e 2011e 2010e 2011e 2010e 2011e
POSCO Dec 005490.KS RMBm 4,929 6,204 5,061 5,255 -3% 18%Nippon Steel Mar 5401.T JPYm 146 218 186 225 -21% -3%JFE Holdings Mar 5411.T JPYm 166 195 181 206 -9% -5%Baosteel Dec 600019.SS RMBm 9,079 12,491 10,126 12,003 -10% 4%Angang Dec 0347.HK RMBm 4,304 8,561 5,201 6,570 -17% 30%Maanshan Dec 0323.HK RMBm 2,445 3,916 2,089 2,872 17% 36%China Steel Corp Dec 2002.TW TWDm 37,666 49,111 36,719 38,408 3% 28%SAIL Mar SAIL.BO INRm 72,478 97,204 83,043 94,557 -13% 3%Tata Steel Mar TISC.BO INRm 47,538 59,235 56,491 73,245 -16% -19%JSW Steel Mar JSTL.BO INRm 17,758 27,346 20,596 31,550 -14% -13%Bluescope Jun BSL.AX AUDm 93 465 85 376 9% 23%
Source: HSBC estimates, Bloomberg; Note: For JFE, Nippon Steel, JSW Steel, SAIL and Tata Steel, 2010e represents March 2011.
HSBC Asia Steel Earnings and commodity price revisions
_______________ New ______________ _____________% revision _____________ ______________y-o-y % _____________Net profit Unit 2010e 2011e 2012e 2010e 2011e 2012e 2010e 2011e 2012e
POSCO KRWbn 4,929 6,204 7,396 -10% 0% 5% 55% 26% 19%
Nippon Steel JPYbn 146 218 240 -10% -2% -2% nm 49% 10%JFE Holdings JPYbn 166 195 202 -9% -2% -1% 263% 18% 4%Baosteel RMBm 9,079 12,491 12,896 -24% -5% -6% 56% 38% 3%Angang HKDm 4,304 8,561 8,461 -30% -6% -16% 472% 99% -1%Maanshan HKDm 2,445 3,916 5,887 -29% -1% 0% 523% 60% 50%China Steel TWDm 37,666 49,111 55,289 -11% 5% -17% 93% 30% 13%SAIL INRm 72,478 97,204 na -11% -5% na 9% 34% naTata Steel INRm 47,538 59,235 na -4% -11% na 337% 25% naJSW Steel INRm 17,758 27,346 29,397 -8% -14% na 14% 54% 8%BlueScope AUDm 93 465 548 -1% 16% 1% 66% 400% 18%Commodity forecastsHRC - Asia USD/t 652 713 670 -5% 0% 0% 33% 9% -6%HRC - China USD/t 647 695 668 -3% 0% 0% 23% 7% -4%Rebar - Asia USD/t 615 676 635 -5% 0% 0% 23% 10% -6%Rebar - China USD/t 627 675 648 -3% 0% 0% 19% 8% -4%Iron ore - Fines (fob) USD/t 112 92 74 10% 0% 0% 81% -18% -20%
Coking coal USD/t 231 250 160 -3% 0% 0% 79% 8% -36%Source: HSBC estimates; Note: For JFE and Nippon Steel, SAIL, Tata Steel and J SW Steel, 2010e represents March 2011.
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The Asian Steel sector has been a major casualty
of market risk aversion in 1H10. Stocks under our
coverage have fallen by 25% ytd on average (China
stocks faring worse, down 40%). While sentiment
may remain weak in the near term, we believe steel
prices may soon bottom given prices are now below
costs, which should trigger increasing production
cuts. We stick to our medium-term view that Asia
should remain tightly balanced, shift into a net
importer position and operate at near full capacity.
With valuations now below trend levels and
replacement costs, we reiterate our bullish stance
on Asia Steel.
HSBC Asia Steel coverage ytd price performance
-52%-42%
-38%
-37%
-31%
-27%
-24%-22%
-21%
-17%
-16%
-7%5%
Angang A
Angang H
Maanshan H
Baosteel
Maanshan A
Bluescope
POSCOJFE
Tata Steel
NSC
SAIL
China Steel
JSW Steel
Source: HSBC, Datastream
Near-term headwinds remain in place and 3Q
looks set for a margin squeeze. Recent falls in
Asian steel prices and lower than expected July
contract prices have caused us to reduce 2010
steel price forecasts by 5%. In addition,
notwithstanding lower iron ore and coal prices in
recent months, the current quarterly contract
pricing system (based on three-month spot lag)
suggests an increase in 3Q raw material contract
prices. Combined with the traditional 3Q weaker
demand season approaching, we lower sector EPS
by an average of 13% in 2010, placing us 7%
below consensus estimates.
That said, we believe 3Q will mark the bottom for
profits as prices are now below cash costs of
production which has triggered production cuts. We
believe inventories remain at normal levels. In
addition, whilst seasonality will impact 3Q demand,
it should also assist demand recovery in 4Q.
With current valuations implying below trend
ROE in addition to replacement costs, we believe
the sector has been oversold. Within our coverage
universe, POSCO continues to rank best in our
sector scorecard.
3Q to signal bottom
Sentiment to improve on 3Q output cuts and prices stabilise
3Q margin squeeze under way, reduce sector EPS by 5%
Sector correction overdone reiterate OW stance on Asia Steel
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Supply cuts under wayWith current domestic Chinese HRC spot prices at
RMB4,200, we believe the majority of Chinese
capacity is now operating in losses. This should
trigger supply cuts from producers, which we
believe is under way. According to World Steel
Dynamics (WSD), average HRC production cash
cost in China (with VAT) is RMB4,250/t.
China average HRC production cost (RMB/t)
RMB/t
Iron ore 1,775Coking coal 704Scrap 205Energy 591Labour 184Freight 327Others 464Total 4,250
Source: World Steel Dynamics
A slowdown in production rate is already evident in
Chinas May crude steel production numbers. Crude
steel output in China slowed down to 1.81mtpd in
May from the record 1.85mtpd run-rate achieved in
April 2010. According to CISA production rates
continued to slow down from 1.85mtpd in the first
10 days to 1.80mtpd in the next 10 days and further
to 1.78mtpd in the last 10 days of May.
China average daily crude steel production rates (mtpd)
1.30
1.40
1.50
1.60
1.70
1.80
1.90
Jan-09
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Source: HSBC, NBS, CISA
We believe that the falling steel prices since early
May have resulted in losses for small scale marginal
producers who purchase on spot and has led to
production cuts by these mills. We expect further
production cuts from the small mills in the near term
as they continue to make losses at current prices.
According to China Securities Journal rolling mills
in northern China are estimated to be running at less
than 50% of capacity.
China marginal producers profitability at spot steel and rawmaterial prices (ex-VAT)
RMB/t
Iron ore 1,627Coking coal 942Rolling 1,000Transport 135Cost 3,704HRC price 3,573Profit/ (loss) -132
Source: HSBC, SBB, Bloomberg
Further, with the weakness in steel prices but still
high raw material contract prices we believe the
larger steel mills will face margin squeeze in 3Q
and will be forced to reduce output. Baosteel
Chairman Xu Lejiang has been quoted byMetal
Bulletin saying that Chinese steelmakers will cutproduction or bring forward maintenance in 3Q on
weak demand.
Steel traders in China expect large producers to start
maintenance from July as the mills cannot afford to
bear high costs during a seasonally weak 3Q.
Furthermore, they note that producers have not yet
started to cut output as traders now bear the losses
instead of producers. However, if spot market prices
continue to fall, steelmakers will have to refund
traders in the end and will have to bear the loss
which will force them to cut output.
According to WSD, average HRC production cash
cost in the World ex-China is USD647/t. With
current Asian HRC spot prices at cUSD625/t
more than 50% of the capacity is under losses. We
believe this will trigger a supply response from
the regional producers.
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World exChina average HRC production cost (USD/t)
USD/t
Iron ore 205Coking coal 114Scrap 56Energy 76Labour 68Freight 60Others 68Total 647
Source: World Steel Dynamics
Outside China also mills have hinted at reducing
output give weak market conditions. POSCO has
already announced that it will be undertaking a
scheduled relining of its No 4 blast furnace with a
capacity of 3.2mtpa in Pohang during July-
September which will reduce 3Q crude steel
production by c200-300kt. Similarly Koreas
Hyundai Steel has announced that it will reduce
output in 3Q due to regular maintenance work
which will last for around two weeks. SBB
estimates that this will reduce Hyundai Steels 3Q
output by 20% q-o-q. Dongkuk Steel has planned
maintenance shutdown for its rolling mills in 3Q.
Demand seasonality 3Qpain before 4Q gain
As detailed in our China Metals & Mining Monitor
The eye of the tigerdated 26 February 2010, we
note that 2Q has traditionally been the strongest for
metal demand in China as indicated by the robust
pick-up in end user activities across construction,
transport, power, consumer goods and other
manufacturing sectors. We have observed that there
is a strong sequential pick-up in demand from these
sectors in 2Q with average growth of 33% over
2006-09 while demand slows down in 3Q before
bouncing back again in 4Q. For 2010 we have
observed a similar pattern with demand in 1Q
declining 13% q-o-q on average. Using the April-
May run rate for the end user activities we estimate
sequential growth of 22% in 2Q.
This corresponds to the demand for finished steel
where it has grown by an average 14% in 2Q over
2006-09. Based on the demand run rate in April-
May we estimate sequential finished steel
consumption growth of 10% in 2Q.
Average q-o-q growth for end user and apparent crude steelconsumption in 2006-09 vs 2010
_ Average 2006-2009___ _______ 2010_________
Apparentcrude steel
demand
End userdemand
Finishedsteel
End user
1Q 2% -12.2% -2% -13.3%2Q 14% 32.7% *10% *22.3%3Q -2% -3.1%4Q 2% 25.4%
Source: HSBC estimates, CEIC, *Note: 2Q10 is estimated based on Apr-May run rate
Steel prices to stabilise
With prices below cash costs of production and
supply cuts under way, we believe steel prices
should soon bottom. We track Chinese steel mills
and traders expectations of a likely price hike (as
per a weekly survey by Mysteel, a Chinese steel
industry source) with steel prices. We can see that
while price hike expectations reached 'trough' levels
in early June (less than 10% of those surveyed
expect a weekly price hike), there has been a
stabilisation and slight upturn in recent weeks.
Mysteel survey of steel traders and steel mill
0%
10%
20%
30%
40%50%
60%
70%
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
3,600
3,750
3,900
4,050
4,2004,350
4,500
4,650
HRC P rices - RMB/ t (RHS) Hike (LHS )
Source: Mysteel
http://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=17kvc47iqf&n=261189.PDFhttp://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=17kvc47iqf&n=261189.PDFhttp://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=17kvc47iqf&n=261189.PDFhttp://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=17kvc47iqf&n=261189.PDF8/8/2019 Asia Steel_3Q 2010
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Oversold Valuations belowtrend and replacement costs
In our view, recent market concerns over China
property clampdown and the European crisis have
been overplayed.
As detailed in our China Metals & Mining Monitor
Property crackdown in focusdated 6 May 2010 we
believe there is little evidence thus far to suggest that
property sector demand has slowed in China. Year to
May, domestic construction completions were up
18% yoy while construction starts were up 72% yoy.
Given the 18-24-month construction period for
typical projects, we believe underlying construction
demand will remain firm (albeit slowing). The
governments roll-out of affordable housing should
also provide some offset to lower private investment.
With respect to Europe, as detailed in our China
Metals & Mining Monitor From overheating to
slowdown fearsdated 4 June, we see that Europeonly accounted for 14% of 2009 global steel
demand compared to Chinas 46%. We do not
believe a European slowdown will have a major
impact on global steel consumption. Our scenario
analysis suggests that if European demand growth
falls flat versus our base case of 24% in 2010,
then this will reduce our global demand forecast
by just 3% to 1.23bt.
Valuations below replacement costs
Valuations (EV/t) for the stocks under our
coverage have fallen by an average 22% from the
current year peak of USD1,200/t in January to
USD931/t at present and are below the eight-year
average of USD950/t. We believe the market is
now discounting an unlikely bearish scenario with
current valuation (EV/t USD931) below
replacement cost of new capacity (capex
USD1,036/t).
Asia Steel EV/t of capacity
400
600
800
1,000
1,200
1,400
1,600
May-03
May-04
May-05
May-06
May-07
May-08
May-09
May-10
USD/t
Average USD950/t Spot USD931/t
Source: Bloomberg
Asia Steel companies EV/t of capacity
EV/t of Capacity (USD/t)
POSCO 826Nippon Steel 1155JFE Holdings 1040Baosteel 794Angang - A 641Angang - H 641Maanshan - A 335Maanshan - H 335China Steel 1096SAIL 1134Tata Steel 689JSW Steel 1098Bluescope 634Average 931
Source: HSBC
New capacity costs
Company Project Country ProjectType
Capacity(mtpa)
Capex(USDbn)
Capex/t(USD)
China Steel Dragon steelBF #2
Taiwan Greenfield 2.5 2.8 1,139
China Steel Dragon steelBF #1
Taiwan Greenfield 2.5 2.5 1,000
Angang Bayuquan China Greenfield 5.0 4.2 848Hyundai Steel BF #1 and #2 Korea Greenfield 4.0 4.7 1,168Baostee l Zhanjiang China Brownfie ld 5.0 5.1 1,026Average 1,036
Source: HSBC
http://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=kjkt5tq5h8&n=266824.PDFhttp://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=kjkt5tq5h8&n=266824.PDFhttp://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=kjkt5tq5h8&n=266824.PDFhttp://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=lmyuazyu2b&n=269448.PDFhttp://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=lmyuazyu2b&n=269448.PDFhttp://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=lmyuazyu2b&n=269448.PDFhttp://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=lmyuazyu2b&n=269448.PDFhttp://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=lmyuazyu2b&n=269448.PDFhttp://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=lmyuazyu2b&n=269448.PDFhttp://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=lmyuazyu2b&n=269448.PDFhttp://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=kjkt5tq5h8&n=266824.PDFhttp://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=kjkt5tq5h8&n=266824.PDF8/8/2019 Asia Steel_3Q 2010
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2010 quarterly forecasts
We estimate 3Q to be the trough for earnings for
companies under our coverage as they are hit by a
double whammy of rising raw material costs and
weak steel prices. We expect margins to rebound in
4Q as both factors turn around and increasing steel
prices are accompanied by lower raw material costs.
Asia steel companies quarterly NPAT forecasts
Company Unit Mar 10 Jun 10 Sep 10 Dec 10
POSCO KRW bn 1,437 1,406 992 1,093Nippon Steel JPY bn 34 44 25 41JFE JPY bn 47 53 27 47Baosteel RMB mn 3,930 1,945 1,170 2,035China Steel TWD mn 11,054 10,960 7,227 8,426Angang RMB mn 1,152 1,414 315 1,423Maanshan RMB mn 521 879 302 743SAIL INRm 20,849 20,207 17,285 16,269TATA INRm 24,052 17,681 14,677 13,947JSW INRm 7,170 5,924 3,952 4,713
Source: HSBC estimates
What's in the price? Below trend valuations
We believe the market is now pricing in an unlikely
bearish scenario with implied ROEs below historical
trend. At current prices, we estimate the implied
ROEs for our preferred steel names (POSCO,
Maanshan, SAIL, Baosteel) are materially below
their respective historical ROEs. For full details,
please refer to the relevant table on page 8.
Sector scorecard summary
We first introduced our sector scorecard on 19 June
2009. The aim of the scorecard is to assist in refining
the stock selection process, with the full tabledetailed on the following page. Under this system,
POSCO, SAIL and Maanshan rank best, while
Nippon Steel, JFE and Tata Steel rank among the
worst. We note that these results are consistent with
our PB-ROE valuation methodology.
Stock-specifics
We reiterate our OW(V) ratings on POSCO,
Maanshan, Baosteel, Angang, China Steel,
SAIL, JSW and BlueScope.
POSCOs strong balance sheet, diverse
high-end product mix and low-cost
operations remain attractions for a
quality, defensive regional steel leader.
We believe Maanshan has attractive
valuations, trading at 0.8x PB compared
to its recent high of 1.6x and the sector
average of 1.2x.
We like Baosteel for its leverage to
resilient domestic appliance demand
given its dominant market position.
Angang has a raw material advantage,
with a favourable iron ore pricing
arrangement with its parent which should
ensure a cost advantage during an iron
ore upswing.
We like China Steel for its volume
growth and high dividend yield.
SAIL has 100% self-sufficiency in iron
ore and thus is largely protected from
price increases.
We like JSW Steel for improving iron ore
integration and volume leverage. Further,
if the tie-up with JFE goes through, this
could lead to a potential rerating.
BlueScope remains one of the cheapest
stocks in the sector, trading at 0.7x 2010ePB against the sector average of 1.2x. We
believe the company is a direct
beneficiary of recent currency revisions
by our FX Research Team.
We keep JFE, NSC and Tata Steel at N(V).
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Whats in the price? HSBC Steel target prices and ratings 16 June 2010
POSCO NSC JFE Baosteel Angang Maanshan CSC SAIL TATA JSW BSL
Assumptions- Risk free rate 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 5.0%- Market risk premium 6.5% 3.5% 3.5% 6.0% 6.0% 6.0% 5.5% 6.5% 6.5% 6.5% 4.5%- Beta 1.3 1.2 1.3 1.1 1.3 1.3 1.0 1.2 1.3 1.3 1.2CoE 12% 8% 9% 11% 12% 12% 10% 12% 13% 12% 11%Long term growth 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%Current price 472,000 318 2,986 6.13 9.91 3.53 30.70 198 486 1,057 2.35Currency KRW JPY JPY RMB HKD HKD TWD INR INR INR AUDFinancial year for book value Dec-10 Mar-11 Mar-11 Dec-10 Dec-10 Dec-10 Dec-10 Mar-12 Mar-12 Mar-12 Jun-11BV/share 460,000 300 2,931 5.55 8.85 4.24 20.8 115 457 694 3.27Current PB 1.0 1.1 1.0 1.1 1.1 0.8 1.5 1.7 1.1 1.5 0.7Implied ROE 12% 9% 9% 12% 14% 10% 14% 21% 13% 19% 8%Historical ROE (2002-08) 15% 11% 15% 15% 15% 12% 19% 40% 33% 21% 16%Forecast ROE (2010-12) 16% 10% 12% 11% 12% 13% 17% 21% 17% 21% 8%Long-term sustainable ROE 16% 10% 10% 15% 15% 13% 17% 25% 15% 24% 10%Target PB 1.3 1.2 1.2 1.4 1.3 1.1 1.8 2.1 1.2 1.9 0.9Price (derived) 598,000 361 3,370 7.76 11.33 4.45 37.48 243 548 1318 2.94HSBC target 600,000 360 3,350 8.00 12.00 4.50 37.00 256 562 1280 3.00Upside / (downside) 27.1% 13.2% 12.2% 30.5% 21.1% 27.5% 20.5% 29.3% 15.7% 21.1% 27.7%Div yield 2.7% 1.3% 2.4% 3.3% 3.5% 3.6% 8.1% 1.5% 1.4% 1.3% 1.7%Potential return 29.8% 14.5% 14.6% 33.8% 24.5% 31.0% 28.7% 30.8% 17.1% 22.4% 29.4%Neutral band +0.5 to 20.5 -2.5 to 17.5 -2.5 to 17.5 +0.0 to 20.0 +0.0 to 20.0 +0.0 to 20.0 -0.5 to 19.5+0.5 to 20.5 +0.5 to 20.5 +0.5 to 20.5 -0.5 to 19.5HSBC rating OW (V) N (V) N (V) OW (V) OW (V) OW (V) OW (V) OW (V) N (V) OW (V) OW (V)
Previous rating OW (V) N (V) N (V) OW (V) OW (V) OW (V) OW (V) OW (V) N (V) OW (V) OW (V)Previous target 650,000 360 3,600 9.00 15.00 6.00 42.00 272 690 1460 3.50Previous ROE assumptions 17% 10% 10% 17% 20% 16% 19% 25% 17% 24% 11%Previous PB multiple 1.4 1.2 1.2 1.5 1.6 1.3 2.0 2.1 1.4 1.9 1.1
Source: HSBC estimates
HSBC Asia Steel sector score card
Rank Stock Gearing Iron ore integration Profitability ROE / ROIC Valuation Overall score20% 10% 20% 20% 30% 100%
1 Posco 2.0 4.0 4.0 2.5 1.7 2.62 SAIL 1.0 1.0 4.0 1.5 9.7 4.33 Maanshan 6.0 10.0 6.3 5.0 2.0 5.14 Bluescope 4.0 4.0 7.3 10.0 2.7 5.55 China Steel 3.0 9.0 6.7 3.0 8.3 5.96 Angang 8.0 8.0 6.3 7.0 5.0 6.67 Baosteel 5.0 10.0 7.0 7.0 6.3 6.7
8 JSW 11.0 6.0 3.0 3.5 9.0 6.89 Nippon 7.0 2.0 6.7 10.0 7.3 7.110 Tata Steel 10.0 3.0 6.0 8.0 7.7 7.411 JFE 9.0 7.0 8.7 8.5 6.3 7.8
Source: HSBC estimates
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Asia Steel performance table
Stock and commodity performances ytd, as at 16 Jun 2010
Unit Spot 1M 3M 6M 1Y y-t-d Peakprice
Date ofpeak
Spot vspeak
Troughprice
Date oftrough
Spot vstrough
Equities
POSCO KRW 472000 7% -14% -21% 10% -24% 625000 11-Jan-10 -24% 434500 20-May-10 9%NSC JPY 318 -2% -8% -12% -15% -15% 395 12-Jan-10 -19% 300 09-Jun-10 6%JFE JPY 2986 -2% -17% -13% -6% -18% 3840 05-Apr-10 -22% 2798 09-Jun-10 7%Baosteel RMB 6.13 -2% -25% -31% -6% -37% 9.66 01-Jan-10 -37% 6.05 08-Jun-10 1%Angang A RMB 7.76 -2% -36% -49% -34% -52% 16.00 01-Jan-10 -52% 7.68 08-Jun-10 1%Angang H HKD 9.91 -1% -32% -43% -21% -42% 18.24 05-Jan-10 -46% 9.08 10-Jun-10 9%Maanshan A RMB 3.46 1% -19% -33% -23% -31% 5.08 05-Jan-10 -32% 3.38 07-Jun-10 2%
Maanshan H HKD 3.51 2% -25% -40% -28% -38% 6.07 05-Jan-10 -42% 3.38 25-May-10 4%China Steel TWD 30.70 -2% -7% -2% 14% -7% 35.30 11-Jan-10 -13% 29.30 09-Jun-10 5%SAIL INR 198.05 -6% -19% -6% 19% -18% 256.35 06-Apr-10 -23% 186.70 25-May-10 6%Tata Steel INR 485.50 -9% -24% -13% 8% -21% 694.45 16-Apr-10 -30% 452.40 08-Jun-10 7%JSW Steel INR 1056.80 -10% -15% 8% 55% 4% 1289.25 16-Apr-10 -18% 960.65 10-Feb-10 10%BlueScope AUD 2.35 -3% -17% -17% -6% -24% 3.30 11-Jan-10 -29% 2.15 25-May-10 9%Equity indicesKorea Composite 1705.3 3% 2% 2% 22% 1% 1752.20 26-Apr-10 -3% 1552.79 08-Feb-10 10%TOPIX 892.4 -3% -5% -1% -2% -2% 998.90 15-Apr-10 -11% 850.37 09-Jun-10 5%Shanghai Index 2,570 0% -16% -21% -7% -22% 3,282 05-Jan-10 -22% 2,512 07-Jun-10 2%Taiwan Weighted 7,454 -2% -5% -4% 20% -9% 8,357 15-Jan-10 -11% 7,072 09-Jun-10 5%HSI Index 20,062 2% -6% -7% 10% -8% 22,417 06-Jan-10 -11% 18,986 25-May-10 6%ASX Ordinary 4572.1 2% -6% -2% 16% -6% 5024.10 15-Apr-10 -9% 4286.30 25-May-10 7%Sensex 17462.9 4% 0% 3% 17% 0% 17970.02 07-Apr-10 -3% 15790.93 05-Feb-10 11%CurrenciesJPY:USD 91 1% -1% -2% 5% 2% 88 03-Mar-10 -3% 95 04-May-10 4%RMB:USD 6.83 0% 0% 0% 0% 0% 6.82 09-Apr-10 0% 6.83 11-Feb-10 0%HKD:USD 7.79 0% 0% 0% -1% 0% 7.75 06-Jan-10 0% 7.80 08-Jun-10 0%KRW:USD 1230 -6% -8% -5% 2% -5% 1104 26-Apr-10 -10% 1254 26-May-10 2%TWD:USD 32 -1% -2% 0% 2% -1% 31 29-Apr-10 -3% 32 07-Jun-10 1%AUD:USD 1.16 -2% -6% -4% 9% -4% 1.07 14-Apr-10 -8% 1.24 07-Jun-10 6%INR:USD 46 -2% -2% 0% 3% 0% 44 09-Apr-10 -5% 48 25-May-10 2%Commodities pricesSteelChina domestic HRC RMB/t 4,180 0% 0% 12% 14% 9% 4,570 14-Apr-10 -9% 3,700 26-Jan-10 13%China export HRC USD/t 605 -12% 3% 19% 32% 19% 690 11-May-10 -12% 510 01-Jan-10 19%Japan domestic HRC USD/t 787 1% 13% 24% 46% 28% 803 20-May-10 -2% 600 07-Jan-10 31%East Asia import HRC USD/t 625 -11% 2% 18% 30% 18% 710 27-Apr-10 -12% 530 01-Jan-10 18%China domestic rebar RMB/t 3,820 -5% -3% 9% 9% 2% 4,340 13-Apr-10 -12% 3,710 05-Mar-10 3%China export rebar USD/t 590 -11% 8% 16% 16% 16% 660 20-Apr-10 -11% 510 01-Jan-10 16%China rebar future RMB/t 3,995 -1% -10% -1% 2% -4% 4,614 16-Apr-10 -13% 3,946 05-Feb-10 1%Japan domestic rebar USD/t 700 1% 13% 26% 32% 30% 714 20-May-10 -2% 525 07-Jan-10 33%East Asia import rebar USD/t 580 -15% 4% 14% 25% 13% 685 20-Apr-10 -15% 515 01-Jan-10 13%
BulksIron ore cif (India to China) USD/t 152 -14% 10% 43% 102% 36% 189.5 23-Apr-10 -20% 112 01-Jan-10 36%Hebei iron ore RMB/t 1,190 -6% 6% 38% 65% 31% 1,400 16-Apr-10 -15% 920 01-Jan-10 29%Coking coal (Aust) USD/t 235 0% 7% 38% 104% 38% 250 01-Apr-10 -6% 205 01-Jan-10 15%China spot RMB/t 1,720 7% 7% 27% 66% 27% 1,720 31-May-10 0% 1,350 01-Jan-10 27%Commodities inventorySteelLong Steel Mt 8.3 -3% -14% 56% 99% 49% 9.7 05-Mar-10 -15% 5.6 01-Jan-10 47%Flat Steel Mt 7.3 -2% -16% 8% 45% 9% 8.8 05-Mar-10 -17% 6.7 01-Jan-10 9%Total Steel Mt 15.6 -2% -15% 29% 69% 27% 18.6 05-Mar-10 -16% 12.3 01-Jan-10 27%BulksIron ore port inventory Mt 72 1% 0% 3% 2% 7% 73 05-Jun-10 -1% 67 01-Jan-10 8%
Source: Datastream, Bloomberg, China Coal Resource
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HSBC Asia Steel valuation tableHSBC Asian steel comparables, calendar year basis, 16 June 2010
Share Market cap _____________________ EPS* ______________________ ______________________DPS* ______________________price (USDm) 2008 2009 2010e 2011e 2012e 2008 2009 2010e 2011e 2012e
POSCO KRW 472,000 29,002 58,905 41,380 64,290 80,931 96,477 10,000 8,000 12,858 16,186 19,295Nippon Steel JPY 318 23,620 31 5 16 31 36 7 3 3 6 8JFE Holdings JPY 2,986 20,020 360 149 256 355 379 98 38 59 82 88Baosteel RMB 6.13 15,712 0.37 0.33 0.52 0.71 0.74 0.18 0.20 0.20 0.32 0.33Angang - A RMB 7.76 6,984 0.41 0.10 0.59 1.18 1.17 0.21 0.06 0.30 0.59 0.58Angang - H HKD 9.91 1,381 0.41 0.10 0.59 1.18 1.17 0.21 0.06 0.30 0.59 0.58Maanshan - A RMB 3.46 3,022 0.10 0.05 0.32 0.51 0.76 0.00 0.04 0.11 0.18 0.27Maanshan - H HKD 3.53 785 0.10 0.05 0.32 0.51 0.76 0.00 0.04 0.11 0.18 0.27China Steel NTD 30.70 12,404 2.01 1.53 2.92 3.80 4.28 1.73 1.40 2.50 3.26 3.67
SAIL INR 198 17,480 14.66 15.46 17.20 22.04 26.18 3.18 2.88 2.88 3.13 3.05Tata Steel INR 486 9,210 82.81 -2.99 34.54 63.50 99.53 15.98 9.99 6.94 11.53 13.17JSW Steel INR 1,057 4,228 32.07 65.94 92.13 133.42 154.46 4.25 7.38 13.06 20.01 23.16BlueScope AUD 2.35 3,702 0.92 -0.61 0.14 0.37 0.23 0.29 0.00 0.07 0.19 0.11Total 147,549
_____________________ PE (x) ______________________ __________________ FCF yield (%)___________________2008 2009 2010e 2011e 2012e 2008 2009 2010e 2011e 2012e
POSCO 8.0 11.4 7.3 5.8 4.9 9% 3% -5% 12% 15%Nippon Steel 10.2 69.0 19.5 10.4 8.9 8% -1% 1% 5% 7%JFE Holdings 8.3 20.0 11.6 8.4 7.9 10% 5% 7% 9% 1%Baosteel 16.6 18.5 11.8 8.6 8.3 0% 6% 6% 11% 13%Angang - A 18.7 74.7 13.0 6.6 6.6 -12% 3% 3% 14% 14%Angang - H 21.0 83.6 14.6 7.3 7.4 -8% 2% 2% 9% 9%Maanshan - A 33.4 67.9 10.9 6.8 4.5 8% 16% 14% 18% 27%
Maanshan - H 29.8 60.7 9.8 6.1 4.0 7% 14% 12% 15% 23%China Steel 15.3 20.1 10.5 8.1 7.2 5% 3% 10% 14% 18%SAIL 13.5 12.8 11.5 9.0 7.6 1% -4% -5% -5% 12%Tata Steel 5.9 nm 14.1 7.6 4.9 12% -1% 6% 10% 31%JSW Steel 33.0 16.0 11.5 7.9 6.8 -10% -6% 3% 3% -2%BlueScope 2.6 nm 16.5 6.4 10.2 9% -6% 6% 9% 8%Average 12.3 30.3 12.3 8.0 7.1 5% 2% 2% 8% 12%
EV/t capacity _________________ EV/EBITDA (x) __________________ ____________________ ROE (%)_____________________Reuters (USD) 2008 2009 2010e 2011e 2012e 2008 2009 2010e 2011e 2012e
POSCO 005490.KS 826 4.4 6.8 4.5 3.2 2.7 17% 11% 15% 16% 17%Nippon Steel 5401.T 1155 5.9 10.1 9.6 7.4 6.4 11% 2% 6% 10% 11%JFE Holdings 5411.T 1040 5.0 8.0 7.2 6.1 5.8 15% 6% 9% 12% 12%Baosteel 600019.SS 794 5.4 5.6 4.6 3.8 3.2 7% 6% 9% 12% 12%Angang - A 000898.SZ 641 8.7 11.3 6.8 4.5 4.3 6% 1% 8% 14% 13%
Angang - H 0347.HK 641 8.7 11.3 6.8 4.5 4.3 6% 1% 8% 14% 13%Maanshan - A 600808.SS 335 6.1 6.7 3.9 2.9 2.2 3% 1% 9% 13% 17%Maanshan - H 0323.HK 335 6.1 6.7 3.9 2.9 2.2 3% 1% 9% 13% 17%China Steel 2002.TW 1096 10.6 22.1 8.7 6.9 5.9 10% 8% 15% 18% 19%SAIL SAIL.BO 1134 7.8 7.1 6.1 5.0 3.4 25% 22% 20% 22% 21%Tata Steel TISC.BO 689 4.9 7.6 6.2 5.2 3.5 23% -1% 9% 15% 20%JSW Steel JSTL.BO 1098 12.3 10.6 8.0 5.8 5.0 8% 15% 18% 22% 21%BlueScope BSL.AX 634 5.5 8.9 5.9 4.2 4.1 11% 1% 5% 9% 8%Average 931 6.3 9.2 6.6 5.1 4.3 14% 8% 12% 15% 15%
* All data in local currency except for Maanshan H and Angang H which are in RMBSource: Company data, HSBC estimates
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HSBC Asia Steel valuation tableHSBC Asian steel comparables, calendar year basis, 16 June 2010
Rating ___________________ Price/book ____________________ ____________________ ROIC (%) ____________________2008 2009 2010e 2011e 2012e 2008 2009 2010e 2011e 2012e
POSCO OW (V) 1.3 1.2 1.0 0.9 0.8 27% 13% 20% 23% 24%Nippon Steel N (V) 1.2 1.2 1.1 1.0 0.9 11% 2% 4% 8% 9%JFE Holdings N (V) 1.2 1.1 1.0 0.9 0.9 11% 5% 7% 8% 8%Baosteel OW (V) 1.2 1.1 1.1 1.0 0.9 7% 6% 8% 10% 11%Angang - A OW (V) 1.1 1.1 1.0 0.9 0.8 5% 2% 6% 10% 10%Angang - H OW (V) 1.2 1.2 1.1 1.0 0.9 5% 2% 6% 10% 10%Maanshan - A OW (V) 1.0 1.0 0.9 0.8 0.7 5% 3% 8% 13% 17%Maanshan - H OW (V) 0.9 0.9 0.8 0.8 0.7 5% 3% 8% 13% 17%China Steel OW (V) 1.6 1.6 1.5 1.4 1.3 15% 4% 15% 19% 23%
SAIL OW (V) 3.0 2.5 2.2 1.8 1.5 21% 19% 20% 21% 22%Tata Steel N (V) 1.4 1.4 1.2 1.1 0.9 16% -59% -12% 12% 17%JSW Steel OW (V) 2.5 2.2 1.9 1.6 1.3 7% 6% 8% 10% 12%BlueScope OW (V) 0.6 0.8 0.7 0.7 0.7 8% 2% 5% 8% 8%Average 1.5 1.4 1.2 1.1 1.0 15% 4% 10% 14% 15%
Target Return to _________________ Net debt/equity__________________ _________________ EPS growth (%) _________________price target 2008 2009 2010e 2011e 2012e 2008 2009 2010e 2011e 2012e
POSCO KRW 600,000 29.8% 5% -2% -2% -9% -9% 21.6% -29.8% 55.4% 25.9% 19.2%Nippon Steel JPY 360 14.5% 56% 57% 50% 45% 40% -41.7% -85.2% 253.9% 87.5% 17.2%JFE Holdings JPY 3,350 14.6% 104% 102% 92% 80% 71% -18.4% -58.5% 71.8% 38.3% 6.9%Baosteel RMB 8.00 33.8% 32% 25% 29% 21% 7% -49.2% -10.0% 56.1% 37.6% 3.2%Angang - A RMB 9.50 26.3% 44% 57% 58% 46% 36% -63.1% -74.9% 472.3% 98.9% -1.2%Angang - H HKD 12.00 24.5% 44% 57% 58% 46% 36% -63.1% -74.9% 472.3% 98.9% -1.2%Maanshan - A RMB 4.50 33.2% 61% 55% 35% 21% 10% -70.3% -50.9% 522.9% 60.2% 50.3%
Maanshan - H HKD 4.50 31.0% 61% 55% 35% 21% 10% -70.3% -50.9% 522.9% 60.2% 50.3%China Steel NTD 37.00 28.7% 28% 26% 16% 8% 2% -55.0% -24.1% 90.9% 30.2% 12.6%SAIL INR 256 30.8% -37% -40% -25% -10% -24% -16.7% 5.5% 11.2% 28.2% 18.8%Tata Steel INR 562 17.1% 174% 160% 141% 128% 92% -40.2% nm nm 83.8% 56.7%JSW Steel INR 1,280 22.4% 231% 230% 192% 157% 137% -63.2% 105.6% 39.7% 44.8% 15.8%BlueScope AUD 3.00 29.4% 29% 15% 15% 12% 10% 10.6% nm nm 157.0% -37.2%Average 48% 44% 40% 34% 25% -26.2% -35.5% 128.9% 51.8% 16.7%
_______________ EBITDA margin (%) ________________ ________________ Dividend yield (%) ________________2008 2009 2010e 2011e 2012e 2008 2009 2010e 2011e 2012e
POSCO 27.6% 19.3% 27.1% 28.1% 31.3% 2.0% 1.6% 2.9% 3.3% 3.8%Nippon Steel 13.8% 10.3% 9.4% 10.2% 12.0% 2.2% 0.8% 1.2% 1.9% 2.1%JFE Holdings 17.7% 13.4% 14.5% 14.9% 16.3% 2.9% 1.1% 1.9% 2.5% 2.6%Baosteel 13.3% 16.6% 17.0% 17.0% 17.1% 2.6% 2.9% 2.9% 4.9% 5.1%Angang - A 11.7% 11.3% 17.2% 20.6% 23.6% 2.2% 0.6% 4.5% 6.6% 7.3%
Angang - H 11.7% 11.3% 17.2% 20.6% 23.6% 2.0% 0.6% 4.1% 6.0% 6.6%Maanshan - A 9.9% 12.2% 15.9% 16.0% 21.0% 0.0% 1.0% 4.1% 4.6% 6.9%Maanshan - H 9.9% 12.2% 15.9% 16.0% 21.0% 0.0% 1.1% 4.5% 5.1% 7.6%China Steel 17.3% 12.7% 23.5% 21.6% 27.2% 5.2% 4.2% 8.4% 9.3% 13.3%SAIL 21.6% 25.2% 30.4% 31.4% 37.2% 1.5% 1.3% 1.3% 1.4% 1.4%Tata Steel 12.8% 14.1% 14.8% 15.6% 21.6% 2.6% 1.1% 1.1% 2.3% 2.6%JSW Steel 20.6% 21.4% 21.6% 23.9% 32.7% 0.3% 0.8% 1.2% 1.9% 3.7%BlueScope 9.4% 5.6% 7.1% 9.0% 9.4% 11.1% 0.0% 3.8% 4.2% 5.7%Average 18.0% 15.8% 19.5% 20.2% 23.5% 2.6% 1.6% 2.8% 3.6% 4.3%
Source: Company data, HSBC estimates
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3Q to signal bottom 3Supply cuts under way 4
Demand seasonality 3Q pain before 4Q gain 5
Steel prices to stabilise 5
Oversold Valuations below trend and replacement costs 6
3Q margin squeeze pricesdown, costs up 13
Company Summaries 17POSCO (OW(V), TP KRW600,000) 18
Nippon Steel (N(V), TP JPY360) 19
JFE (N(V), TP JPY3,350) 20
Baosteel (OW(V), TP RMB8) 21
Angang (OW(V), TP HKD12 / RMB9.5) 22
Maanshan (OW(V), TP HKD4.5 / RMB4.5) 23
China Steel (OW(V), TP TWD37) 24
SAIL (OW(V), TP INR256) 25
Tata Steel (N(V), TP INR562) 26
JSW Steel (OW(V), TP INR1,280) 27
Bluescope (OW(V), TP AUD3) 28
Disclosure appendix 32
Disclaimer 35
Contents
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Lowering steel price forecast by 5%
We continue to believe that steel demand in the
region remains robust and expect regional markets to
remain tight. However, given the macroeconomic
concerns surrounding Chinas overheating property
sector and the sovereign debt crisis in Europe,
market sentiment has been hit hard, leading to a
negative flow-on effect for regional steel prices. As a
result, we cut our 2010 steel price estimates by 5%
to fully reflect this period of spot market weakness.
HSBC 2010e steel price forecast changes
Old New Chg
Asia (USD/t)
HRC 688 652 -5%Rebar 649 612 -6%
China (USD/t)
HRC 670 641 -4%Rebar 650 610 -6%
Source: CRU, HSBC estimates
Chinese mills under our coverage have already
announced a cut to their July contract price in the
range of 8-9%. Regional mills has been more
resilient: Nippon Steel recently secured a 25%
price hike for the April-September 2010 period
while Steel Business Briefing (SBB) reports that
POSCO is considering a quarterly price increase
to reflect higher raw material costs. At the same
time, China Steel Corp announced a price hike of
an average 6.6% for its July shipments.
Since recent peaks in mid-April, HRC prices have
fallen 8.5% while Rebar has suffered a 12% fall.
However, we believe domestic steel prices in China
have reached stable support levels, with spot prices
below industry average costs of production.
We calculate current HRC production costs in
China to be RMB3,704/t (ex VAT), based on spot
domestic iron ore and coking coal prices. Given
that spot HRC prices are RMB3,573/t (ex VAT),
the average domestic commodity grade HRC
producer is making a loss of RMB132/t. We
believe this provides a floor to HRC prices and
historically, prices have rebounded strongly after
falling below cost of production levels.
3Q margin squeeze prices down, costs up
Reduce 2010 steel price forecast by 5% to reflect weak spot
prices and poor market sentiment
Chinas marginal steel capacity under losses at current prices; will
result in production cutback and provide pricing floor
Iron ore price set to increase in 3Q as flagged by the miners,
coking coal contract price increase 12% q-o-q
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China HRC production cost
RMB/t
Iron ore 1,627Coking coal 942Rolling 1,000Transport 135Cost 3,704HRC price 3,573Profit/ (loss) -132
Source: HSBC, SBB, Bloomberg
China HRC prices and production cost
2,300
2,800
3,300
3,800
4,300
4,8005,300
Jun-07
Sep-07
Dec-07
Mar-08
Jun-08
Sep-08
Dec-08
Mar-09
Jun-09
Sep-09
Dec-09
Mar-10
Jun-10
HRC production cost HRC price ex VAT
Source: HSBC, Bloomberg, SBB
Raw material prices
It has been widely accepted by the market that the
traditional annual benchmark pricing mechanisms
for bulks (iron ore and coking coal) have been
done away with. Towards the end of MarQ10, the
major miners (VALE, BHP and RIO) all but
confirmed a structural shift to quarterly contract
pricing, although there is limited transparency
with respect to the negotiations process.
Pricing for quarterly iron ore
Metal Bulletinhas attempted to derive the
quarterly iron ore pricing methodology for both
VALE and BHP/RIO.
VALEs pricing methodology is more transparent
as it uses the average prices index (chosen at the
customers discretion) for the three-month period
directly proceeding the month before the quarter
in question. Therefore, JunQ10 contracts (forApril, May, June) are priced to the average of
index prices from 1 Dec 2009 to 28 Feb 2010.
In order to test this pricing methodology, we use
theMetal Bulletin/Bloomberg China Iron ore
fines price as our base index. Based on the
guidelines, we calculate the Dec 09 to Feb 10
average price was USD129.80/t (on a 66% grade
CFR basis). Taking the average Brazil-China
freight rate of USD30.11/t over the same period,
we derive a VALE JunQ10 contract price of
USD99.69/t (on a FOB basis). This compares
favourably to press reports (Bloomberg, Reuters)
in mid-April 2010 that suggested VALE agreed
on JunQ10 contract prices of cUSD100-110/t.
Metal Bulletin notes that while BHP and RIO
have not revealed their pricing formulae, it
believes that both companies use a pricing
mechanism based on the full preceding quarter.
Therefore, JunQ10 pricing uses an index average
for the 1 Jan to 31 Mar 2010 period. As done
previously, we use theMetal Bulletin/Bloomberg
China Iron ore fines price as our base index andderive a Jan-Mar average CFR price of
USD133.64/t. With Australia-China freight rates
averaging USD10.64/t over this period, we arrive
at a BHP/RIO JunQ10 FOB fines prices of
USD123/t. Once again, this compares favourable
to press reports (Reuters) that indicated a likely
JunQ10 price settlement of USD120/t.
Given we have established theMetal Bulletin
pricing methodology as a fair indicator for
quarterly iron ore pricing, we calculate indicative
VALE, BHP/RIO SepQ10 pricing outcomes.
Iron ore pricing on a FOB basis (USD/t)
JunQ10 SepQ10e Spot QoQ % Vs Spot %
VALE 105.00 146.16 132.51 39% -9%BHP/RIO 120.00 157.44 139.54 31% -11%
Note: Spot pricing is based on 14 June 2010.Source: Bloomberg, Metal Bulletin, HSBC estimates
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HSBC regional steel price assumptions and changes from previous forecasts
____________________Far East steel price (USD/t)______________________ __________________ Change from previous forecast____________________Rebar Plate HRC CRC HDG Rebar Plate HRC CRC HDG
2009 500 513 490 585 648 0% 0% 0% 0% 0%2010e 612 686 652 760 816 -6% -5% -5% -5% -4%2011e 676 768 713 813 870 0% 0% 0% 0% 0%2012e 635 720 670 769 829 0% 0% 0% 0% 0%2013e 604 685 638 737 799 0% 0% 0% 0% 0%
_____________________ China steel price (USD/t)_______________________ __________________ Change from previous forecast____________________Rebar Plate HRC CRC HDG Rebar Plate HRC CRC HDG
2009 525 527 528 654 654 0% 0% 0% 0% 0%2010e 610 657 641 782 782 -6% -3% -4% -2% -2%2011e 675 699 695 797 808 0% 0% 0% 0% 0%2012e 648 677 668 778 787 0% 0% 0% 0% 0%2013e 628 661 648 763 771 0% 0% 0% 0% 0%
Source: CRU, HSBC estimates
Asian Steel EBITDA sensitivity to USD10/t change in steel prices
____Base case ASP (USD/ t) ____ Unit ______Forecast EBITDA________ ________ EBITDA chg _________2010e 2011e 2010e 2011e 2010e 2011e
POSCO 810 879 KRW bn 7,923 10,183 5% 4%Nippon steel 1,563 1,645 JPY bn 431 548 7% 6%JFE 1,132 1,196 JPY bn 505 538 6% 6%Baosteel 1,234 1,151 RMB mn 31,230 36,574 5% 5%Angang 674 709 RMB mn 13,499 19,393 10% 7%Maanshan 661 687 RMB mn 9,357 11,150 11% 9%China Steel 727 712 TWD mn 51,258 61,409 7% 6%SAIL 773 797 INR mn 124,593 165,134 5% 4%Tata Steel 904 920 INR mn 152,671 167,163 8% 7%JSW Steel 769 796 INR mn 52,277 71,721 6% 6%BlueScope 1,493 1,804 AUD mn 580 1,116 11% 7%
Source: HSBC estimates
Asian Steel EBITDA sensitivity to USD10/t change in iron ore or coking coal price
Unit ______ Forecast EBITDA _______ ___ Coking coal sensitivity _____ ______Iron ore sensitivity ______2010e 2011e 2010e 2011e 2010e 2011e
POSCO KRW bn 7,923 10,183 -4% -3% -9% -7%Nippon steel JPY bn 431 548 -4% -4% -11% -9%JFE JPY bn 505 538 -4% -3% -10% -9%Baosteel RMB mn 31,230 36,574 -4% -4% -8% -8%Angang RMB mn 13,499 19,393 -6% -4% -16% -11%Maanshan RMB mn 9,357 11,150 -6% -6% -17% -15%China Steel TWD mn 51,258 61,409 -5% -5% -11% -10%
SAIL INR mn 124,593 165,134 -3% -3% 0% 0%Tata Steel INR mn 152,671 167,163 -5% -4% -13% -12%JSW Steel INR mn 52,277 71,721 -4% -3% -10% -9%BlueScope AUD mn 580 1,116 -16% -8% -13% -7%
Source: HSBC estimates; Note: base case iron ore +81% in 2010, -18% in 2011, coking coal +79% in 2010, +8% in 2011
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Company Summaries
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POSCO (OW(V), TPKRW600,000)
Remains the regional leader
We continue to view POSCO as the pick of the
sector, with its strong balance sheet, diverse high-
end product mix and low-cost operations making
it stand out amongst its regional peers. In a recent
HSBC hosted conference in early May 2010,
management noted market conditions were robust
and the company was running at full productioncapacity.
In mid-May, according to Reuters POSCO was
confirmed as the preferred bidder for the
controlling stake in Daewoo International for a
reported offer price of USD3bn (cKRW3.4trn).
We see the completion of this proposed
transaction as a key near-term catalyst, being
strategically and financially positive. The
company has stated that it expects the deal to be
finalised in 2H10.
Earnings changes
POSCO earnings revisions
Revenues (KRWbn) Old New % Chg
2010e 34,701 34,876 0.5%2011e 37,298 37,827 1.4%2012e 36,732 37,003 0.7%
EBIT (KRWbn) Old New % Chg
2010e 7,069 5,674 -19.7%2011e 7,997 7,717 -3.5%2012e 9,037 9,192 1.7%
Net Profit (KRWbn) Old New % Chg
2010e 5,470 4,929 -9.9%2011e 6,181 6,204 0.4%2012e 7,043 7,396 5.0%
Source: HSBC estimates
Valuation and risksWe reiterate our OW(V) rating and reduce our
target price to KRW600,000 (KRW650,000),
valuing the stock at 1.3x PB (1.4x) and 2010e
book value of KRW460,000 per share. We arrive
at a PB multiple of 1.3x from our residual income
model (P/B= ROE-g/COE-g) using our 2010-12
forecast ROE of 16% (17%).
We consider POSCO stock to be volatile. Under
our research model, for Korean stocks with avolatility indicator, the Neutral band is 10
percentage points around the hurdle rate of 10.5%
(or 0.5-20.5%). Our KRW600,000 target price
implies upside of 27.1% over the closing price on
16 June of KRW472,000. Adding in the 2.7%
dividend yield implies a potential return of 29.8%.
As such, we maintain our OW(V) rating.
The upside and downside risks for POSCO lie in
the movement of steel prices. The key downside
risks are a more severe slowdown in the US or
China, which in turn would negatively impact
steel consumption growth. On the raw material
side, movements in iron ore, coal and nickel
prices provide additional risk.
POSCO: key data
YE Dec Sales(KRWbn)
NPAT(KRWbn)
EPS(KRW)
PE(x)
PB(x)
Div Yield(%)
ND/E(%)
EV/EBITDA(x)
FY09 26,954 3,172 41,380 11.4 1.2 1.7 -2 6.8
FY10e 34,876 4,929 64,290 7.3 1.0 2.7 -2 4.5FY11e 37,827 6,204 80,931 5.8 0.9 3.4 -9 3.2FY12e 37,003 7,396 96,477 4.9 0.8 4.1 -9 2.7
Note: Ratios based on closing price as on 16 June 2010Source: Company data, HSBC estimates
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Nippon Steel (N(V), TPJPY360)
Price hike a positive, but fairly valued
Our previous uncertainty over the ability of the
company to effectively pass on higher raw material
costs to downstream customers has eased, with
confirmation that NSC has reached an agreement
with Toyota to a 25% contract price hike
(+JPY20,000/t or USD219/t) for the six months to
September 2010. We note that this is the first priceincrease between the two parties for two years and is
indicative that demand for high-end steel products
remains firm. This is supported by Bloomberg news
reports that Toyota and its rival automaker Nissan
have plans to increase their respective global 2010
auto production by 1.7% to 7.4m units and 14.2% to
3.75m units, respectively.
That said at current levels, we see NSC as fairly
valued and maintain our Neutral (V) rating.
Earnings changes
NSC earnings revisions
Revenues (JPYbn) Old New % Chg
2010e 4,799 4,786 -0.3%2011e 5,303 5,336 0.6%2012e 5,014 5,017 0.1%
EBIT (JPYbn) Old New % Chg
2010e 225 199 -11.7%2011e 307 302 -1.5%2012e 381 351 -7.8%
Net Profit (JPYbn) Old New % Chg
2010e 163 146 -10.3%2011e 222 218 -1.9%2012e 244 240 -1.8%
Source: HSBC estimates. Note: 2010e represents March 2011 etc.
Valuation and risksWe keep a Neutral (V) rating for NSC and
maintain our target price at JPY360, valuing the
stock at 1.2x (same) PB in line with its two-year
historical average and FY11e book value of
JPY300/share. We arrive at a PB of 1.2x from our
residual income model (PB = ROE-g/COE-g)
using a sustainable ROE of 10% (same).
Our JPY360 target price suggests potential upside
of 13.2% from the closing price of JPY318 on 16June. Adding in the 1.3% dividend yield implies a
potential return of 14.5%.
The key up and downside risk to our rating lies in
the movement of steel and raw material prices.
The likelihood of the Chinese government either
increasing or reducing steel export taxes also
remains a risk. This in turn would impact the
regional market balance to which NSC sells c40%
of its output and steel export prices. In addition,
the risk of further share market volatility and fund
de-leveraging may also affect performance.
NSC: key data
YE Mar Sales(JPYbn)
NPAT(JPYbn)
EPS(JPY)
PE(x)
PB(x)
Div Yield(%)
ND/E(%)
EV/EBITDA(x)
FY10 3,488 -12 -1.8 nm 1.1 0.5 56 12.5
FY11e 4,786 146 22 14.2 1.1 1.3 47 8.9FY12e 5,336 218 33 9.5 1.0 2.2 44 7.0FY13e 5,017 240 37 8.7 0.9 2.5 38 6.2
Note: Ratios based on closing price as on 16 June 2010Source: Company data, HSBC estimates
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JFE (N(V), TP JPY3,350)Potential contract upside priced in
With headwinds in the form of weak domestic
demand, rising costs and volatile currency still on the
radar, we maintain our Neutral (V) rating on JFE.
On a brighter note, the company recently raised its
HRC and CRC spot prices by JPY10,000/t (or
12% and 11% respectively) for Jul-Sep10
deliveries. We believe that this is indicative of a
future contract price hike, which is in line with
domestic peers and managements announced
flexible pricing formula to ensure quicker pass
through of raw material cost increases. That said,
we believe that potential contract price upside is
already priced in at current levels.
Earnings changes
JFE earnings revisions
Revenues (JPYbn) Old New % Chg
2010e 3,490 3,477 -0.4%2011e 3,665 3,674 0.3%2012e 3,423 3,419 -0.1%
EBIT (JPYbn) Old New % Chg
2010e 336 310 -7.9%2011e 340 335 -1.5%2012e 371 366 -1.3%
Net Profit (JPYbn) Old New % Chg
2010e 181 166 -8.5%2011e 198 195 -1.6%2012e 205 202 -1.5%
Note: 2010e represents March 2011 etc.Source: HSBC estimates.
Valuation and risksWe maintain JFE at Neutral (V) and reduce our
target price to JPY3,350 (JPY3,600), valuing the
stock at 1.2x PB (same), in line with NSCs
valuation and FY11 (March) book value of
JPY2,931. We arrive at a PB of 1.2x from our
residual income model (PB = ROE-g/COE-g)
using a sustainable ROE of 10% (same).
Under our research model, for Japanese stocks
with a volatility indicator, the Neutral band is 10percentage points around the Japan hurdle rate of
7.5% (or -2.5-17.5%). Our JPY3,350 target price
suggests potential return of 14.6% (including div
yield of 2.4%) from the closing price of JPY2,986
as on 16 June, which is within the N(V) band.
The key up and downside risk for the sector lies in
the movement of steel prices; the regions growth
in high-end steel capacity raises the threat of
increased competition. The potential of the Chinese
government either to increase or reduce steel export
taxes also remains a risk. This in turn would impact
the regional market balance to which JFE sells
50% of its output and steel export prices. In
addition, the risk of further share market volatility
and fund de-leveraging may also affect the stocks
performance.
JFE: Key data
YE Mar Sales(JPYbn)
NPAT(JPYbn)
EPS(JPY)
PE(x)
PB(x)
Div yield(%)
ND/E(%)
EV/EBITDA(x)
FY10 2,844 46 86 34.6 1.1 0.7 98 9.8
FY11e 3,477 166 313 9.5 1.0 2.4 89 6.6FY12e 3,674 195 368 8.1 0.9 2.8 77 6.0FY13e 3,419 202 383 7.8 0.9 3.0 69 5.7
Note: Ratios based on closing price as on 16 June 2010Source: Company data, HSBC estimates
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Baosteel (OW(V), TP RMB8)Bottom in 3Q10, recovery in 4Q10
In a HSBC hosted investor call with Baosteel
management in mid June, the company noted that
it saw a likely margin squeeze occurring in 3Q
due to raw material price increases coupled with
lower steel prices. That said, we expect a profit
recovery in 4Q as raw material costs are pushed
lower on increasing domestic supply.
We believe Baosteel is attractively priced at
current levels, particularly given its role as
national steel champion. In our opinion, domestic
steel prices are near the bottom, with spot prices
below cost of production, which should see
marginal producers cut output heading into 3Q. In
addition, steel exports (which account for 8% of
Baosteel sales) should stay at high levels given
the international price premium.
Earnings changesBaosteel earnings revisions
Revenues (RMBm) Old New % Chg
2010e 207,170 202,400 -2.3%2011e 219,545 212,466 -3.2%2012e 235,268 227,648 -3.2%
EBIT (RMBm) Old New % Chg
2010e 17,635 13,719 -22.2%2011e 18,496 17,663 -4.5%2012e 19,313 18,293 -5.3%
Net Profit (RMBm) Old New % Chg
2010e 11,991 9,079 -24.3%2011e 13,140 12,491 -4.9%
2012e 13,699 12,896 -5.9%Source: HSBC estimates
Valuation and risksBaosteels position as Chinas chosen national
champion, in our view, offers it leading status for
consolidation opportunities and parent asset
injections. Baosteel is the domestic market leader
and continues to benefit from exposure to
automobile and appliance demand, with market
shares of 50% and 37% in these respective
sectors. We reiterate our OW(V) rating and
reduce our target price to RMB8 (RMB9) based
on 1.4x PB (1.5x PB) and 2010e book value of
RMB5.55/share. We arrive at a PB of 1.4x from
our residual income model (PB = ROE-g/COE-g)
using a sustainable ROE of 15%, in line with its
2002-09 historical average.
Under our research model, for stocks with a
volatility indicator, the Neutral band is 10ppts
above and below our hurdle rate for Chinese
stocks of 10% (or 0-20%). Our RMB8 target price
suggests potential return of 33.8% (including divyield of 3.3%) from the closing price of RMB6.13
as on 16 June, which is above the N(V) band.
The key downside risk, in our view, lies in the
movement of steel prices. On the raw material
side, movements in coal, nickel, and iron ore
prices provide additional risks. In particular,
Baosteel relies on imported iron ore from
Australia and Brazil.
Baosteel: Key data
YE Dec Sales(RMBm)
NPAT(RMBm)
EPS(RMB)
PE(x)
PB(x)
Div yield(%)
ND/E(%)
EV/EBITDA(x)
FY09 148,525 5,816 0.33 18.5 1.1 3.3 25 5.6
FY10e 202,400 9,079 0.52 11.8 1.1 3.3 29 4.6FY11e 212,466 12,491 0.71 8.6 1.0 5.2 21 3.8FY12e 227,648 12,896 0.74 8.3 0.9 5.4 7 3.2
Note: Ratios based on closing price as on 16 June 2010Source: Company data, HSBC estimates
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Angang (OW(V), TP HKD12 /RMB9.5)
Consolidation is the right direction
While the government approved merger between
Angangs parent company Anshan Iron & Steel and
Panggang Group in late May 2010 should have
minimal near-term impact on the listed company, we
believe there is a distinct possibility for parent asset
injections in the medium term. We see this as a key
catalyst for the stock going forward.
Like its domestic peers, Angang has followed
Baosteels lead in cutting domestic product prices
for July by 9%, reflecting the current soft
domestic pricing environment. That said, we
believe the company will continue to hold a
domestic competitive advantage through its iron
ore pricing arrangement with its parent and
volume growth through the full commissioning of
its 5mt Bayuquan project.
Earnings changes
Angang earnings revisions
Revenues (RMBm) Old New % Chg
2010e 92,816 90,476 -2.5%2011e 97,534 98,119 0.6%2012e 90,274 88,148 -2.4%
EBIT (RMBm) Old New % Chg
2010e 9,165 6,675 -27.2%2011e 13,078 12,345 -5.6%2012e 14,191 12,109 -14.7%
Net Profit (RMBm) Old New % Chg
2010e 6,175 4,304 -30.3%2011e 9,119 8,561 -6.1%2012e 10,025 8,461 -15.6%
Source: HSBC estimates
Valuation and risksWe reiterate our Overweight (V) rating on
Angang and reduce our target price to HKD12
(HKD15), valuing the stock at 1.3x PB (1.6x) and
2010e book value of HKD8.85/share. We arrive at
a PB of 1.3x from our residual income model (PB
= ROE-g/COE-g) using a sustainable ROE of
15% (20%), in line with its 2002-09 historical
average. We decrease our A-share target price to
RMB9.5 (RMB11.5) based on the average A- to
H-share discount of 22%.
We consider Angang A- and H-shares to be
volatile. Under our research model, for stocks
with a volatility indicator, the Neutral band is 10
percentage points above and below our hurdle rate
for Chinese stocks of 10% (or 0-20%). Our
HKD12 target for the H-shares suggests a
potential return, including 3.5% dividend yield, of
24.5%, which is above the Neutral band. Our
RMB9.5 target for the A-shares suggests apotential return, including 3.9% dividend yield, of
26.3%, which is above the Neutral band.
The key downside risk for Angang, in our view,
lies in the movement of steel prices. On the raw
material side, movements in the coal price
represent risks. Delays in Angang groups M&A
activity also pose a risk to current market
expectations.
Angang: Key data
YE Dec Sales(RMBm)
NPAT(RMBm)
EPS(RMB)
PE(x)
PB(x)
Div Yield(%)
ND/E(%)
EV/EBITDA(x)
FY09 70,057 752 0.10 83.6 1.2 0.7 57 11.3
FY10e 90,476 4,304 0.59 14.6 1.1 3.5 58 6.8FY11e 98,119 8,561 1.18 7.3 1.0 6.8 46 4.5FY12e 88,148 8,461 1.17 7.4 0.9 6.7 36 4.3
Note: Ratios based on closing price on 16 June 2010Source: Company data, HSBC estimates
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Maanshan (OW(V), TPHKD4.5 / RMB4.5)
Balanced product mix an advantage
Maanshans balanced product mix allows the
company a high degree of flexibility to adapt to
changing operating conditions. Management has
guided for a 20% uplift in train wheel
(Maanshans highest margin product) sales
volumes from 150kt in 2009 to 180kt in 2010e. In
the long term, Maanshans subsidiary, Hefei Iron& Steel, has commenced construction of a new
flat steel plant consisting of a 3mtpa hot strip mill
and a 1.5mtpa cold strip mill which should further
enable the company to improve its product mix.
We reiterate our OW(V) rating on Maanshan
given its attractive valuation. Trading at 0.8x PB
compared to its recent high of 1.6x and the sector
average of 1.2x, Maanshan stands out as one of
the cheapest steel plays in the region and remains
our preferred steel exposure in China.
Earnings changes
Maanshan earnings revisions
Revenues (RMBm) Old New % Chg
2010e 68,193 66,844 -2.0%2011e 70,319 71,371 1.5%2012e 64,954 64,959 0.0%
EBIT (RMBm) Old New % Chg
2010e 5,738 4,270 -25.6%2011e 6,158 6,088 -1.1%2012e 8,591 8,600 0.1%
Net Profit (RMBm) Old New % Chg
2010e 3,421 2,445 -28.5%2011e 3,972 3,916 -1.4%2012e 5,882 5,887 0.1%
Source: HSBC estimates
Valuation and risksWe maintain an OW(V) rating on Maanshan H
shares but reduce its target price to HKD4.5
(HKD6), based on 1.1x PB (1.3x PB) and 2010e
book value of HKD4.24/share. We arrive at a PB
of 1.1x from our residual income model (PB =
ROE-g/ COE-g) using a sustainable ROE estimate
of 13% (16%) in line with our forecast average
ROE over 2010-12. We reduce our target for the
A-shares toRMB4.5 (RMB5.5) as the A shares are
trading at a par with the H shares.
We consider Maanshans H- and A-shares
volatile. Under our research model, for China
stocks with a volatility indicator, the Neutral band
is 10 percentage points around our hurdle rate of
10% (or 0-20%). Our HKD4.5 target price for the
H-shares implies a potential return of 31%
(including dividend yield of 3.6%) from the
closing price of HKD3.53 on 16 June, which is
above the Neutral band. Our target price ofRMB4.5 for the A-shares implies a potential
return of 33.2% (including dividend yield of
3.2%) from the closing price of RMB3.46, which
is above the Neutral band.
Movement in steel prices represents a key downside
risk for the company. Any potential credit tightening
by the government, having an impact on stimulus
spending, represents a key downside risk, as
Maanshan, with its exposure to long steel, has been a
key beneficiary of the stimulus.
Maanshan: Key data
YE Dec Sales(RMBm)
NPAT(RMBm)
EPS(RMB)
PE(x)
PB(x)
Div yield(%)
ND/E(%)
EV/EBITDA(x)
FY09 50,412 392 0.05 60.7 0.9 1.3 55 6.7
FY10e 66,844 2,445 0.32 9.8 0.8 3.6 35 3.9FY11e 71,371 3,916 0.51 6.1 0.8 5.8 21 2.9FY12e 64,959 5,887 0.76 4.0 0.7 8.7 10 2.2
Note: Ratios based on closing price as on 16 June 2010Source: Company data, HSBC estimates
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China Steel (OW(V), TPTWD37)
Monthly stats indicate strong 1H10
Unlike other companies in our coverage universe,
China Steel (CSC) reports operating data and pre-
tax profit on a monthly basis. From its recently
released May data, we see ytd pre-tax profit at
TWD22.74bn. This run-rate is tracking marginally
ahead of our FY10 forecast of TWD47.2bn and
market consensus of TWD44.8bn. We continue tosee positive price momentum for the company,
with price hikes of 6.6% for CSCs July-August
deliveries on anticipated higher raw material costs
in SepQ10. We note that CSC product prices have
increased by almost one-third since the start of the
year. We believe CSC is well leveraged to a steel
cycle upswing with a robust near-term order book
and strong volume growth. With a 2010e dividend
yield of 8.1% compared to the sector average of
2.7%, the company is the highest dividend payer
in the region.
Earnings changes
CSC earnings revisions
Revenues (TWDm) Old New % Chg
2010e 242,916 248,209 2.2%2011e 271,657 279,897 3.0%2012e 303,572 303,899 0.1%
EBIT (TWDm) Old New % Chg2010e 43,726 37,993 -13.1%2011e 44,926 47,738 6.3%2012e 68,622 54,817 -20.1%Net Profit (TWDm) Old New % Chg2010e 42,266 37,666 -10.9%2011e 46,868 49,111 4.8%2012e 66,838 55,289 -17.3%
Source: HSBC estimates
Valuation and risksWe reiterate our OW(V) on CSC but decrease our
target price to TWD37 (TW42), valuing the stock
at 1.8x PB (2.0x PB) and 2010e book value of
TWD20.8. We arrive at a PB of 1.8x from our
residual income model (PB = ROEg / COE-g)
using a sustainable ROE of 17%, in line with our
average forecast ROE of 17% over 2010-12.
We consider CSC stock volatile. Under our
research model, for Taiwan stocks with avolatility indicator, the Neutral band is 10
percentage points around the hurdle rate of 9.5%
(or -0.5-19.5%). Our NTD37 target price suggests
potential upside of 20.5% over the closing price
on 16 June of NTD30.70. Adding in the expected
8.1% dividend yield suggests a potential return of
28.7%, which is above the Neutral band.
The key risk to our valuation lies in the movement
of steel prices. The key downside risks are a
slowdown in the euro zone, which would
negatively impact steel consumption. On the raw
material side, movements in coal and iron ore
prices are risks. Successful execution of key
growth projects poses a further risk.
China Steel - Key data
YE Dec Sales(TWDm)
NPAT(TWDm)
EPS(TWD)
PE(x)
PB(x)
Div yield(%)
ND/E(%)
EV/EBITDA(x)
FY09 165,409 19,549 1.53 20.1 1.6 4.6 26 22.1
FY10e 248,209 37,666 2.92 10.5 1.5 8.1 16 8.7FY11e 279,897 49,111 3.80 8.1 1.4 10.6 8 6.9FY12e 303,899 55,289 4.28 7.2 1.3 11.9 2 5.9
Note: Ratios based on closing price as on 16 June 2010Source: Company data, HSBC estimates
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SAIL (OW(V), TP INR256)Top pick in the Indian steel space
SAIL is best placed vis--vis its peers on account of
its 100% iron ore integration in a rising cost
environment, in our view. We see the recent
correction in share price as an entry opportunity.
However, we expect price volatility in the near term
over concerns of timing of the FPO and its issue
price. InAsia Steel: Fear vs fundamentals dated 6
May, we mentioned that equity dilution at currentprices is not a concern and could actually be neutral
to marginally positive for the stock.
In the longer term SAIL has aggressive capacity
expansion plans to grow to 20.6mtpa by FY14
(March) from the current 12.6mtpa which will
provide it with strong operating leverage. That said,
we believe that the first phase of the expansion will
come on stream only in FY12 with IISCOs 2mtpa
expansion. We expect an incremental 2mtpa
capacity expansion in FY12-15.
Earnings changes
SAIL earnings revisions (INRm)
New Old Change
SalesFY11e 444,916 465,670 -4%FY12e 558,803 573,468 -3%EBITDAFY11e 124,593 145,121 -14%FY12e 165,134 180,655 -9%NPATFY11e 72,478 81,248 -11%
FY12e 97,204 102,469 -5%
Source: HSBC estimates
Valuation and risksWe lower our target price to INR256 (INR272) as a
result of a 5% cut in our steel price forecasts. We
also marginally cut our volume estimates for SAIL
by 4%/ 3% in FY11/12 as we expect the volume
expansion to be back-ended.
We value SAIL on a blend of PB and
EV/EBITDA. Our PB multiple of 2.1x (same) is
derived from the residual income model,
assuming a long-term sustainable ROE of 25%(same). On EV/EBITDA methodology, we apply
a multiple of 6.5x (same) which is at a c10%
discount to the corresponding multiple for Tata
Steels India operations, given SAILs lack of
captive coking coal. Our PB and EV/EBITDA
derived fair values are INR243 and INR269
respectively. Accordingly, we derive a blended
target price of INR255, which at 16 June closing
price of INR198 offers 30.8% potential return
including dividend yield of 1.5%. The potentialreturn is above the Neutral band of 0.5-20.5% for
a volatile Indian stock with hurdle rate of 10.5%.
Key risk lies in the movement of steel and coking
coal prices as SAIL does not have captive coking
coal assets. Further, given the robust expansion plans
project execution also poses some risks.
SAIL: Key data
YE March Sales(INRm)
NPAT(INRm)
EPS(INR)
PE(x)
P/B(x)
Div yield(%)
ND/E(%)
EV/EBITDA(x)
FY09 437,545 55,389 13.41 14.8 2.9 1.6 -35 8.4
FY10e 366,802 66,661 16.14 12.3 2.4 1.4 -41 6.7FY11e 444,916 72,478 17.55 11.3 2.1 1.5 -20 5.9FY12e 558,803 97,204 23.54 8.4 1.7 1.6 -7 4.7
Note: Ratios based on closing price as on 16 June 2010Source: Company data, HSBC estimates
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Tata Steel (N(V), TP INR562)European operations still haunt
We remain Neutral (V) on Tata Steel given the
margin pressure in European operations due to
higher raw material costs as well as continuing
pressure on prices. Our European Steel Team
recently increased FY11 HRC prices by 3% and
reduced FY12 prices by 3% (seeEuropean Steel:
Dead money or a value opportunity? Why
patience will be rewarded, 7 June). While weexpect a full input cost pass-through in the case of
flat products, we believe the long segments (Tata
Steel Europe has 25% exposure) to come under
pressure. Further, any potential production cut
should inhibit upside from volume leverage on
account of high fixed cost of European operations.
Over the medium term, Indian operations, though
highly profitable, are unlikely to see the benefits
of ongoing expansion to 10mtpa (from 6.8mtpa)
until FY13. Given the high profitability of the
India operations (nearly 4x European
EBITDA/ton), delays in implementation of the
project could be incrementally negative.
Earnings changes
We lower our earnings by 4/11% for FY11/12 on
account of lower steel prices for the more profitable
India business as well as higher iron ore costs for
Corus which is not integrated. We also lower our
FY12 volume assumptions for both Europe (2%)
and India (3%) given delays in India expansion and
the uncertain volume outlook in Europe.
Tata Steel earnings revisions (INRm)
New Old Change
SalesFY11e 1,104,226 1,057,523 4%FY12e 1,144,443 1,191,676 -4%EBITDAFY11e 152,671 155,476 -2%FY12e 167,163 188,910 -12%NPATFY11e 47,538 49,268 -4%FY12e 59,235 66,523 -11%
Source: HSBC estimates
Valuation and risksOur new target price for Tata Steel is INR562
(INR690). We value Tata Steel based on a 50-50
blend of PB and EV/EBITDA. We have revised
our long-term sustainable ROE assumption to
15% (17%) primarily given the uncertainty of
volume expansion in Europe and accordingly our
residual income derived PB multiple stands at
1.2x (1.4x). On EV/EBITDA methodology, we
value Tata Steel on a SOTP basis with multiples
of 7x, 4.5x and 2x for the Indian, European and
other Asian operations, respectively. Our PB
derived fair value of INR548 and EV/EBITDA
derived fair value of INR576 blend into a target
price of INR562. Our target price implies a
potential return of 17% (including 1.4% dividend
yield) over the closing price of INR486 on 16
June, which is within the HSBC Neutral band of
0.5-20.5% for a volatile Indian stock which has a
hurdle rate of 10.5%.
Key risks include steel prices for an almost input
cost neutral Tata Steel India, while demand,
utilization, pricing and input cost issues form key
risks for the European operations.
Tata Steel: Key data
YE March Sales(INRm)
NPAT(INRm)
EPS(INR)
PE(x)
P/B(x)
Div yield(%)
ND/E(%)
EV/EBITDA(x)
FY09 1,475,949 49,509 56.02 8.7 1.5 3.3 188 4.9
FY10 1,035,790 -20,092 -22.66 nm 1.3 1.6 151 9.4FY11e 1,104,226 47,538 53.61 9.1 1.2 1.4 138 5.6FY12e 1,144,443 59,235 66.80 7.3 1.1 2.7 125 5.0
Note: Ratios based on closing price as on 16 June 2010
Source: Company data, HSBC estimates
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JSW Steel(OW(V), TP INR1,280)
Flying high
We keep JSW at OW(V) given its volume leverage,
product mix and better cost structure over the
medium term from captive iron ore and coking coal.
Given the above-average earnings growth, strong
operating leverage and expansion in margins, we
believe current valuations are not demanding.
Moreover, JSW has signed an MOU with JFEthrough which JFE could potentially take a minority
stake in JSW as well as partner JSW for its 10mtpa
greenfield project in West Bengal. We believe that if
the JFE tie-up goes through, then it could lead to a
further re-rating of the stock.
JSW has recently commissioned first phase of its
Hot Strip mill which will enable it to produce higher
margin products. Further, we expect the additional
3.2mtpa of crude capacity at Vijaynagar to come on
stream by March 2011. Over the medium term,
JSWs focus on raw material integration is positive
as it should help to improve its cost structure.
JSW expects to produce c8mt of incremental iron
ore from captive sources in Karnataka and Chile
within the next 18-24 months. Commissioning of the
beneficiation plant at Vijaynagar will also allow use
of cheaper low grade ores. On the coking coal front,
the company recently acquired coking coal mines in
the US. These mines have resources totalling 123mt
and JSW expects 1mtpa of production starting
September 2010, which could ramp up to c3mt over
the next two years with FOB cost of cUSD100/t
(currently USD205/t).We have not factored these
improvements in raw material linkages given
execution slippages in the past.
Earnings changes
JSW Steel earnings revisions (INRm)
New Old Change
SalesFY11e 258,250 260,422 -1%FY12e 323,617 326,944 -1%EBITDAFY11e 52,277 55,992 -7%FY12e 71,721 80,328 -11%NPATFY11e 17,758 19,405 -8%FY12e 27,346 31,783 -14%
Source: HSBC estimates
Valuation and risks
We lower our TP to INR1,280 (INR1,460) due to
earnings estimates cuts. We value JSW on a 50-50
blend of PB and EV/EBITDA. Our PB multiple of
1.9x (same) is derived from the residual income
model assuming a long-term sustainable ROE of
24% (same), while our EV/EBITDA multiple of6.0x (same) is at a 10% discount to SAIL due to its
lower backward integration. Our PB derived fair
value of INR1,240 and EV/EBITDA derived fair
value of INR1,318 blend into our target price of
INR1,280. The potential return of 22.4% includes
dividend yield of 1.3% over the closing price of
INR1057 on 16 June and is above HSBCs Neutral
band of 0.5-20.5% with hurdle rate of 10.5%.
Any upward movement in steel prices and
downward movement in iron ore and coking coal
prices are positive for the stock. Tie-up with JFE
Steel is a key near term trigger.
JSW Steel: Key data
YE March Sales(INRm)
NPAT(INRm)
EPS(INR)
PE(x)
P/B(x)
Div yield(%)
ND/E(%)
EV/EBITDA(x)
FY10 189,572 15,637 83.62 12.6 2.1 0.9 221 9.8
FY11e 258,250 17,758 94.96 11.1 1.8 1.3 183 7.5FY12e 323,617 27,346 146.23 7.2 1.5 2.1 150 5.4FY13e 328,049 29,397 157.20 6.7 1.3 2.2 133 4.9
Note: Ratios based on closing price as on 16 June 2010Source: Company data, HSBC estimates
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Bluescope (OW(V), TP AUD3)Currency moves a positive
We keep our OW(V) rating on Bluescope (BSL),
noting that valuation remains attractive. In our view,
BSLs vertically integrated business model provides
leverage to improved operating conditions.
BSL is a direct beneficiary of recent currency
moves, with USD appreciation strengthening the
dollar contribution of its US-based divisions
(Coated and Hot Rolled productions), which
account for c25% of 2010e revenues. In addition,
a weakening AUD increases the companys
pricing competitiveness. We believe the key near-
term catalyst will be the FY10 results due in mid
August. Management has guided for a small
profit, encouraged by continued improvement in
domestic/export demand, resilient steel prices and
internal cost reduction initiatives.
Earnings changesBlueScope earnings revisions
Revenues (AUDm) Old New % Chg
2010e 9,655 9,954 3.1%2011e 12,042 13,617 13.1%2012e 12,499 13,426 7.4%EBIT (AUDm) Old New % Chg2010e 231 233 1.1%2011e 664 771 16.1%2012e 869 881 1.3%Net Profit (AUDm) Old New % Chg2010e 93 93 -0.5%2011e 401 465 15.9%2012e 545 548 0.6%
Source: HSBC estimates
Valuation and risks
We maintain our rating at Overweight (V) but cut
our target price to AUD3 (AUD3.5) based on PB
of 0.9x (1.1x) and its FY11e book value of
AUD3.27/share. We arrive at a PB of 0.9x from
our residual income model (PB = ROE-g/COE-g)
using a sustainable ROE of 10% (11%).
We consider BlueScope stock volatile. Under our
research model, for Australia stocks with a
volatility indicator, the Neutral band is 10percentage points around the hurdle rate of 9.5%.
Our AUD3 target price suggests potential return
of 27.7% over the closing price on 16 June of
AUD2.35. Adding in the expected 1.7% dividend
yield suggests a potential return of 29.4%, which
is above the Neutral (V) band.
Movement in steel prices remains the key risk for
the company. Our FX Research Team
substantially lowered its AUD/USD to 0.85 for
2010-11 (from 0.95 and 1.00 respectively) in its
10 June 2010 Currency Outlookreport. This was a
key driver in increasing our BSL earnings
estimates. Any currency appreciation over
forecast poses a downside risk.
BlueScope Steel - Key data
YE Jun Sales(AUDm)
NPAT(AUDm)
EPS(AUD)
PE(x)
PB(x)
Div Yield(%)
ND/E(%)
EV/EBITDA(x)
FY09 10,333 56 0.06 39.1 0.8 2.1 13 9.1
FY10e 9,954 93 0.05 46.1 0.8 1.7 16 8.7FY11e 13,617 465 0.25 9.2 0.7 5.5 13 4.4FY12e 13,426 548 0.30 7.8 0.7 6.4 11 4.0
Note: Ratios based on closing price as on 16 June 2010Source: Company data, HSBC estimates
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Disclosure appendix
Analyst Certification
The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the
opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their
personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific
recommendation(s) or views contained in this research report: Daniel Kang, Jatin Kotian, Sarah Mak and Lun Zhang
Important disclosuresStock ratings and basis for financial analysis
HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which
depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations.
Given these differences, HSBC has two principal aims in its equity research: 1) to identify long-term investment opportunities
based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon;
and 2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative,
technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating.
HSBC has assigned ratings for its long-term investment opportunities as described below.
This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when
HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at
www.hsbcnet.com/research. Details of these short-term investment opportunities can be found under the Reports section of thiswebsite.
HSBC believes an investor's decision to buy or se