FY15 results in line with expectations
Maanshan announced its FY15 results on a PRC GAAP basis after the marketclose on 30 March 2015. It recorded revenue of RMB45bn, achieving 103% FY15DBe and 100% Bloomberg consensus. Maanshan’s FY15 NPAT was a RMB4.8bnnet loss, in line with FY15 DBe’s NPAT (RMB4.8bn net loss) and Bloombergconsensus (RMB4.8bn net loss). As Maanshan already announced this on 29January, we believe these results should be a non-event for the share price.
Profitability deteriorated; book value lost 21% YoY
The company’s ASP decreased by RMB716/t in FY15 and its unit cost was cut byjust RMB526/t. As such, Maanshan reported a negative gross profit ofRMB581m, while its sales volume only slightly declined by 1%. Its GP/tdecreased from RMB168/t in 2014 to negative RMB22/t in 2015. Only wheelremained to contribute positive gross profit, but its amount WAS too small tooffset the big loss from plate, section and wire products. Maanshan decreasedthe financing costs by 34% YoY, (benefiting from USD appreciation, according tothe company’s comments), but increased the SGA expense, which was up 17%YoY, resulting from a PBT drop to negative RMB4.7bn. As of year-end 2015,Maanshan’s book value fell to RMB18bn, significantly losing 21% YoY.
Concerns remain on Maanshan’s weak balance sheet
We continue to have concerns on its balance sheet due to: 1) Maanshan’s netgearing ratio deterioration from 71% in 2014 to 84% in 2015; 2) non-currentliability due within a year has notably climbed to RMB5bn as two significantdebts will be due in 2016 – also, since Maanshan holds just RMB5bn in cash onhand, new financing is required; and 3) Maanshan owns c.US$670m in US dollardebt, while it has just US$391m in cash. Foreign exchange loss may be as largeas RMB21m, if we assume a USD/CNY depreciation to 7.00 by the end of 2016.
Poor profitability; unattractive valuation; reiterating Sell
We remain cautious on the China steel industry as we have not yet seen anysignificant improvements in the supply/demand balance. ConsideringMaanshan’s shrinking book value, the current trading price of HK$1.47 is trailingPBx of 0.51x or a 12-month forward PBx of 0.76, making it not cheap. OurHK$0.66 TP is derived from PBx of 0.33x (trough of cycle since 1999).