Poor 1H15 results for Angang, expect to improve in 4Q15
Angang reported 1H15 results after market close on Aug 28, 2015. Thecompany’s revenue under IFRS at RMB29bn, down 19% HoH and 24% YoY, isin line with our FY15E though misses Bloomberg Finance LP consensus.Angang’s 1H15 NPAT arrived at RMB155m, RMB0.021/share, implying only14% our FY15E and 22% Bloomberg Finance LP consensus. ConsideringAngang announced profit warning on July 14, 2015, we do not think thisdisappointing 1H15 result is a big negative surprise to the market. The resultsummary tables can be found in the following pages.
Worse-than-expected sales volume, better-than-expected average unit grossprofit, limited impact from RMB depreciation
1H sales volume lost 6% HoH and 7% YoY, worse than our expectation ofdown 2%. However, Angang’s 2Q revenue and COGS should imply slight salesvolume improvement, c. 3% QoQ because steel prices were dropping in 2Q15,down c.9% QoQ. 1H15’s export volume climbed to 1.37 mt, up 27% YoY.Climbing export helps to offset shrinking domestic sales to some extent.Angang demonstrated a better-than-expected average unit gross profit in1H15, which was down 15% HoH and 3% YoY while benchmark HRC spreadlost 18% HoH and 10% YoY during the same period. Believing product mixmanagement contributed outperformance, we will wait for management todisclose details of sales volume breakdown by products to make furthercomments. Angang has a US debt of USD400m, c.11% of total debt. So, theimpact from RMB depreciation will not seriously hurt the bottom line.
Historically low PBx reflects all negatives
Steel price trajectory is still moving negatively. Angang’s profitability in 3Qmay still be under pressure, but we forecast a rebound of steel spread in 4Q15,due to certain supply discipline after two quarters of historically lowprofitability and cashflow. Meanwhile, we forecast an improvement of propertysales and acceleration of government expenditure. Angang is currently tradingat HK$3.69, implying a 12-month-forward PBx of 0.56x, close to the lower endof its historical trading bands. We think all negatives have been priced intocurrent share price. We maintain our Buy for Angang. We set our target priceon the 5-year average PBx. Major risk: dramatic Chinese policy adjustment,weaker than expected steel demand.