Thanks to the sales volume growth, 1H14 revenue rose 3.4% YoY to RMB38,177 million. Sales volume of steel rose 9.8% YoY to 10.0 mt. gross margin was down 1.5 ppt YoY to 10.3% in 1H14 mainly due to weak steel price. Net profit was down 17.8% YoY to RMB577 million in 1H14, slightly lower than our expectation.
We revise up our revenue forecasts by 2.7%, 4.2% and 5.4%, respectively, in FY14-16F to reflect modest sales volume growth of Angang Steel. However, we lower our gross profit margin assumption in FY14-16F by 0.6 ppt. 0.5 ppt and 0.3ppt, respectively, as we believe steel price might be weaker than expected. Despite effective costs control, earnings are likely to be eroded by higher than expected impairment losses. As such, we lower our earnings forecasts by 18.9%, 13.2% and 11.0% in FY14-16F, respectively.
Despite the reinforcement of costs control in coming years, Angang Steel’s earnings visibility remains low. We think iron ore price fluctuations might only be slightly positive to Angang Steel. Steel sector is still facing oversupply in 2014 and recent weak steel prices might weigh down sector rating. We maintain the investment rating of fiNeutral fiand TP of HK$5.50, representing FY14-16F PBR of 0.654x, 0.642x and 0.628x, respectively.