1H16 results in line with DBe, beat market consensus
Maanshan announced 1H16 results on 30 August. The company’s revenuewas RMB21bn, down 10% YoY and 3% HoH, achieving 42% of FY16 DBe and47% Bloomberg consensus. Its 1H16 NPAT came in at RMB453m, in line withDBe achieving 46% of FY16 DBe, but beat market consensus of RMB85m inFY16. As Maanshan has announced preliminary earnings on 13 July, webelieve the results should be a non-event.
Unit GP improved c.RMB465/t HoH
In 1H16, sales volume declined 11% HoH to 8.44mt. Nevertheless,Maanshan’s unit gross profit improved c.RMB465/t HoH, due to c.RMB190/tASP increase and c.RMB280/t product cost cut. Considering that 3Q16 QTDHRC spreads was similar to that in 1H16, we believe Maanshan’s profitabilityin 3Q is likely to be weaker than that of 2Q, but better than that of 1Q.
Depreciation policy changed; cash declined notably
Maanshan changed the depreciation policy by expanding useful life of PP&Esof its subsidy, Yangtze River Steel by 3~10 years. This change resulted in anadditional NPAT of RMB18.46m. Though net debt only slightly climbed toRMB17.8bn, Maanshan’s declining cash at RMB3.8bn, a historical low since2007, as of 30 June, may raise concern on increasing debt going forward.
Mediocre outlook, Hold maintained
Maanshan may continue stable profitability in 3Q as current steel QTD HRCspreads is only RMB100/t lower than ASP of that in 2Q. In spite of that, weremain concerns on the uncertainty of profitability in 4Q, without seeingsignificant changes in demand and supply. Hold maintained.