PRC Steel
The Bull vs. The Bear: We Are Not Following The Herd
 Today bull, tomorrow bear? – We remain bearish on the China steel sector.
Admittedly, it is tempting to join the bullish herd, especially given likely short-term
upside for Maanshan and Angang on improving sequential data points and
selective positive macro newsflow. But while we missed the turn in the China steel
stocks, we should not adapt our fundamental view to fit the share price.
 Bull and the Bear: 6 questions from our strategist – In this report, we address six
questions posed by our Asia ex-Japan equity strategist about the investment case
for China steel stocks. Our approach is to present the evidence, and then argue
the bull case and bear case with impartiality (we hope!). As such, investors can
separate "fact" from "faith" and reach their own conclusions.
 Faith and the fundamentals – Investors seem to be focusing on 1) high levels of
apparent consumption; 2) signs of a price recovery 3) favourable government
policies – namely, the setting up of working teams to speed FAI, a lowering of the
capital requirement ratio and an edict to close inefficient steel plants. Other
relevant factors are seasonality, inventory cycles and slow policy effects.
 Resisting upgrades, because we don’t have conviction – While some trends clearly
are improving – raising the potential for a return to profitability – we cannot turn
positive when stocks are factoring in a 10%+ jump in prices. At such a level,
China would be flooded with imports absent a global recovery in steel demand.
 What if faith and the fundamentals converge? – The risk to our view is that current
improvements accelerate, delivering strong demand and profitability.

By No Means An “Easy” Call 3
Q with A; both the Bull case and Bear case 3
1) China steel stocks have moved a lot in the past 2 months. What
are current multiples and how do they compare to prior recoveries? 3
2) What are stocks prices implying as regards future prices and
demand? 4
3) So, to buy these stocks now, you have to assume a V-shaped
recovery? 5
4) Who benefits most from the stimulus package: long product
producers or flat producers? 5
5) Are we seeing any signs of an inventory build? 6
6) What is the risk to share prices if we see a softening of demand? 7
The Improving State of Steel 9
Non-Steel elements 9
Demand – The Current Thinking 10
Steel Macro Cycle Updates 11
Flat Steel Charts 16
Long Product Charts 18
Valuation & Risks 20
Angang Steel 20
Maanshan Iron and Steel 20
Baoshan Iron & Steel 20
Wuhan Iron And Steel 21
Appendix A-1 22

[此贴子已经被作者于2009-5-23 22:54:40编辑过]