FY16 results in line with FY16DBe, but beat consensus
Angang announced FY16 results after market close on 28 March. Anganggenerated revenue of RMB 57.8bn, up 10% YoY, reaching 98% DBe and 100%Bloomberg consensus. The company reported NPAT of RMB1.6bn, turningaround from net loss of RMB4.6bn in FY15. Its bottom line was in line withFY16DBe at 96% of DBe, but beat Bloomberg consensus by achieving 108%. Acash dividend of RMB0.067 per share was announced.
　　1Q17 results could continue the trend and beat market consensus
Angang sold total steel product of c.20mt, up 4.4% YoY and total steel exportfell to 2.1mt, down 26% YoY. Profitability in 2016 significantly improved. TotalGP of Angang increased to RMB7.4bn, implying GP/t improvement byRMB212/t to RMB372/t, in line with market trajectory. Given that QTD steelspreads in 1Q17 further expanded by c.RMB200/t QoQ, we expect incrementalgross profit of c.RMB1bn for Angang in 1Q17. Compared to current Bloombergconsensus estimate of Angang’s FY17 gross profit at c.RMB9bn, we believeAngang’s 1Q17 results should beat consensus.
　　Net gearing ratio declined in FY16 and expected to improve in FY17
With strong operating cashflow of RMB4.4bn, Angang actively paid back largedebt and managed to decrease net gearing ratio to 50% as of 2016 year-endfrom 58% at 2015 year-end. Angang may place c. RMB1.5bn capex in 2017,and we expect its strong operating cashflow of c.RMB5bn in FY17 to be largeenough to cover the expenditure. As such, we could continue to see netgearing to decline in 2017 and very strong free cash flow yield at c.15%.
　　Remain optimistic on steel industry in 2017, Buy reiterated
We remain optimistic about the China steel industry. We believe theprofitability of China’s steel industry should remain high as improvingdemand/supply status pushes the average industry utilization rate back toc.80% in the next several years. Given our expectations that Angang couldbeat consensus 1Q17 estimates and improve its balance sheet in FY17, wereiterate Buy on Angang. Major risk: significant macroeconomic policychanges.