Still loss in 1H14 but is narrowing QoQ
Maanshan announced its 1H14 results after market close on August 19th. The company made a RMB730m net loss for 1H14. This should be a disappoint to DB and market consensus as DB is expecting 2014FY NPAT at positive RMB310m and Bloomberg consensus is looking for RMB291m NPAT for Maanshan in 2014FY. However, Maashan has sequential (QoQ) improvement for its NPAT, operating cashflow, and AR/inventory days (details as tables below). As such, we doubt the disappointing 1H14 results will hurtMaanshan's share price much.
Larger decline in ASP than in costs squeezed out profits
Maanshan’s unit cost for steel products in 1H14 decreased 9% YoY, due to declining iron ore and coal prices. ASP of steel products decreased 10%, making gross profit per ton 45% lower YoY and bottom line red. However, Q2 improvement might reflect management’s efforts in cost and ASP control, which have been effective to some extent. If iron ore and coal prices remain weak, we are looking for turning points in Maanshan’s performance.
Looking for turnaround in 3Q14
In the result report, the company is guiding that July was a profitable month for Maanshan. Meanwhile, the company will adjust its depreciation method in 2H14. The adjustment will affect Maanshan's bottom-line in 2H14 by RMB338m. As such, we don't think there will be a downward revision for the projections about Maanshan's 14FY NPAT. Fundamentally, we also see Maanshan can sustain its profit-making situation after July. As such, we reiterate Buy for Maanshan.