Angang 1H15 results implies QoQ improvement in 2Q15Angang announced its 1H15 profit warning alert after market close on July14th. Its 1H15 NPAT arrived at RMB 155 m, implying a NPAT of RMB136 m in2Q15 after stripping out NPAT of RMB19m in 1Q15. Angang's 2Q NAPTactually implied a 716% QoQ improvement. We believe this QoQ profitabilityimprovement is better than our expectation, although Angang's 1H15 NAPTdropped significantly comparing to its 1H14 NAPT of RMB577m, down 73%YoY, Our original expectation is Angang at most got about breakeven in 2Q15.
Profit improvement likely stemmed from product mix changeThe steel market has been experiencing a quicker deterioration since thebeginning of this year. When tracked steel spreads we originally believed aworsened profitability for Angang in 2Q15 than that in 1Q15. We believe thatthis better-than-expected profit in the second quarter should be stemmed fromeither changes in product mix or non-recurring items. We will need to wait forthe further detail to be disclosed when official results are reported.
Expecting 2H15 improvement for steel sector. Buy re-iteratedCurrent steel spreads are lowest since 2009 and most steel mills believecurrent significant industry loss is not sustainable. We thus expect moremeaningful production halt from here. We also expect some demand recoveryin 2H15 after government expenditure acceleration. As such, likely Chinesesteel mills will start to experience profitability improvement in 2H15. Angang'svaluation now is at 0.5x 12-month forward PBx, close to its lows of PB tradingbands. With an undemanding valuation and the momentum of profitabilityimprovement, we re-iterate Buy on Angang.