Maanshan's FY13 results in line with its preliminary number; a non-event
Maanshan announced its FY13 results after market close. Its NPAT reached RMB157m vs. a net loss of RMB3,863m in 2012. The result was largely in line with its preliminary result of RMB150m, announced on 28 January, and thus considered as a non-event. Stripping out its one-off gain of c.RMB714m from the disposal of unprofitable subsidiaries, Maanshan’s steel operation was still loss-making amid a weak market. We see no imminent turnaround of the demand/supply situation for the steel industry and believe it should be trading at a PBx of 0.4-0.7x, the range of the last three years. Our target price of HK$1.9 is based on our 0.51x 2013E BVPS; maintaining Hold.
Operating profit improved YoY, but still at a loss if not for asset disposal gain
Maanshan’s operating profit improved to RMB1,471m in FY13 from negative RMB324m in FY12. As shown in , it is mainly due to the steel segment’s higher sales volume (+10% YoY) and lower costs (-11% YoY for COGS/t) despite the ASP fall (-8% YoY). In the meantime, its SG&A expenses were well under control, accounting for 2.4% of revenue in FY13 vs. 2.3% in FY12. However, the company still incurred great amounts in finance costs (RMB1,154m) and impairment losses (RMB1,164m) due to its high gearing and inventory write-offs. If not for its gain of c.RMB714m (including a direct gain and a related-tax rebate) on the disposal of unprofitable subsidiaries to the parent company, its results would still be in the red. Moreover, its operating cashflow decreased by 9% YoY despite its NPAT turnaround, showing its profit on book may not be able to translate to a real cashflow increase.
No change in industry fundamentals; maintaining Hold
The company’s 2014 production growth target for pig iron/crude steel/steel products is 1.9%/3.3%/5.6%. With limited volume growth, its future earnings are largely dependent on steel ASP and raw materials (e.g., iron ore and coking coal) prices. The industry data showed that the 1Q14 steel spread (steel prices minus raw materials costs) is worse than 1Q13/4Q13 on a YoY or QoQ term. Thus, we are concerned that 2014 will still be a difficult year for the steel sector. As we discussed in our note, Still difficult to see blue sky – key takeaway from Hebei trip (25 February), we believe the demand/supply situation in the steel industry is not improving and we believe the stock should be trading at a PBx of 0.4-0.7x – its past three years’ range. Our TP translates to 0.51x 2013E/2014E BVPS, while the current price is trading at 0.44x/0.43x 2013E/2014E BVPS. Key risk: higher-/lower-than expected iron ore/steel prices.