PRC Steel Update
Near term rally sets the stage
for disappointment
J Clarke
Research Analyst
(852) 2203 6371
j.clarke@db.com
Mixed signals, but sector fundamentals look weak
Opinions regarding the outlook for the PRC steel sector vary widely depending on
the level of belief in the efficacy of the government stimulus package. We are not
believers in the sustained rebound of demand, but expect a short term lift in steel
prices and consumption volumes to be followed by a painful downturn. A bounce
looks likely, but in our view only the brave should wade in. This report changes
ratings, price targets, and/or estimates for several companies under coverage: for
a detailed listing of these changes see page 3.
Deutsche Bank AG/Hong Kong
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
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may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research
is available to customers of DBSI in the United States at no cost. Customers can access IR at
http://gm.db.com/IndependentResearch or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE
LOCATED IN APPENDIX 1.
Forecast change
Top picks
Maanshan (0323.HK),HKD3.03 Sell
Angang Steel (0347.HK),HKD8.34 Sell
Companies featured
Maanshan (0323.HK),HKD3.03 Sell
2007A 2008E 2009E
P/E (x) 18.2 13.4 77.7
EV/EBITDA (x) 8.8 5.7 7.0
Price/book (x) 1.5 0.9 0.9
Angang Steel (0347.HK),HKD8.34 Sell
2007A 2008E 2009E
P/E (x) 16.7 15.5 18.9
EV/EBITDA (x) 8.5 5.8 7.9
Price/book (x) 2.8 1.0 1.0
China Steel (2002.TW),TWD23.75 Hold
2007A 2008E 2009E
P/E (x) 9.4 11.4 12.3
EV/EBITDA (x) 6.6 5.0 5.6
Price/book (x) 2.3 1.3 1.3
Baogang (600019.SS),CNY5.91 Hold
2007A 2008E 2009E
P/E (x) 18.4 10.1 10.9
EV/EBITDA (x) 8.3 4.9 5.1
Price/book (x) 3.4 1.1 1.1
Global Markets Research Company
Drivers of pricing rebound unlikely to support sustained demand growth
PRC steel prices have rallied off the bottom seen in November, amidst anticipation
of stimulus-related spending, limited end-user restocking and higher loan growth.
Magang and Angang share prices rose at the same time.
Drivers of pricing rebound unlikely to support sustained demand growth
The bounce in share prices suggests a sustained recovery in demand, which we
do not expect to see, given: 1) price hikes appear to be stalling; 2) surging iron ore
imports and modest gains in long product prices suggest rapid ramp up of flexible
capacity; and 3) DB expectations of slower new loan growth after February, and
slowing FAI and IP growth through mid-2010.
Flexible production restarting, profits still elusive
Apparent consumption rose 7.3% mom in December, but production is proving
equally flexible, rising 7.4% for the month. The prospect of higher prices has
brought idle capacity back into operation, and rising iron ore imports indicate more
and more small mills are ramping up. Rising production is the key reason limiting
the recovery in product prices; now that mills are recovering cash costs and
increasing output, the price increases are stalling. In the absence of accelerating
demand growth, profit growth will be very difficult to achieve.
Disappointing earnings
We expect 2008 earnings from the steels to be extremely weak. We have had
profit warnings from Angang, and expect poor earnings from Magang and
Baosteel. China Steel released disappointing earnings in Taiwan. We expect 1Q09
numbers also to be poor as the price recovery has only pushed margins at steel
mills back to earnings neutral and not into profitability. In our view, we will need
sustained demand recovery and production cuts to return to sustainable positive
margins.
Valuation and risk
We value steel companies using a residual income model (TP = BV * (ROE -
g)/(COE - g)), applying DB's COE estimates. Positive market sentiment could drive
shares higher before fundamental sector weakness is apparent. In previous cycles,
Magang and Angang have reached P/B of 1.2x, suggesting potentially another
15% - 20% upside before reaching their near term peak. However, fundamentally
we are SELLers of Magang and Angang on a 12 month view. Key risks include
that a sustained rebound in China drives prices higher, and that new bank lending
is not released quickly, resulting in lower than forecast demand .

Table of Contents
Faltering price hikes .......................................................................... 3
Changes to ratings, price targets, and estimates......................................................................3
Price recovery less beneficial than market assumes ................................................................3
Companies and traders in the physical markets........................................................................5
Bank lending likely to create near term demand spike..............................................................5
Steel intensity of new FAI investment decreasing over time....................................................6
Production volumes sensitive to steel and iron ore prices........................................................7
Prices back to cash cost level - earnings are the issue .............................................................8
Angang Steel.................................................................................... 10
Maanshan......................................................................................... 16
Baogang............................................................................................ 22
China Steel ....................................................................................... 28
December Steel Data ...................................................................... 33
Outlook ..................................................................................................................................33
Production growth and breakdown.........................................................................................34
Breakdown of net imports by product type ............................................................................37
International pricing; pricing v. US$ index ...............................................................................38
PRC domestic spot pricing - HRC ...........................................................................................39
PRC domestic spot pricing - Rebar .........................................................................................40
December bulks trade ..................................................................... 41
Outlook ..................................................................................................................................41
Iron ore trade and production .................................................................................................43
Thermal coal trade ..................................................................................................................45
Metallurgical coal trade...........................................................................................................46