CSCI-Metals-Angang Steel (347 HK)：As expected, Angang to deliver a strong 3Q17 - 20171016

As expected, Angang to deliver a strong 3Q17

• Angang Steel issued a positive profit alert for 3Q17, which was well expected and had been flagged in our previous reports.
• China’s iron ore imports reached a record high in Sep-17, which will not be sustainable going forward, whilst the winter steel capacity closure would tighten supply and support steel prices, in our view.
• We maintain Buy rating with the price target maintained at HKD8.0, based on 1.0x FY17E PBR, representing 12.7% upside potential.

Strong 3Q17 margins likely to be sustainable in the remainder of 2017. Angang issued a profit alert, predicting a substantial YoY increase in its net profit for 9M17 to RMB3,285mn. Angang has enjoyed a significant recovery in its margins, on the back of the rebound in flat product prices since mid-Jun. As we have mentioned in our previous note (dated 9 Oct), Angang’s key products are set to see cumulative price increases greater than the hike in its production cost. Looking forward, we maintain our positive on Angang’s earnings prospects.

Solid demand for high-grade iron ore products from Chinese steel mills. In spite of the high stock levels reported at the ports, China’s iron ore imports rose to a record 102.8mn tons in Sept-17, we believe it is reflecting the solid domestic market demand for overseas high-grade ore products. Nonetheless, we believe this uptrend will not be sustainable in the medium term. Meanwhile, China’s iron ore import data has not yet imposed significant margin pressures on steel production. Based on the spot price of steel and iron ore products, most mills are still earning stable cash spread relative to last quarter.

A rising number of cities announced winter closure plans. Ten out of the “2+26” cities have pre-announced detailed production plans, which should see the national daily crude steel production reduced by at least 13% when the policy is in full swing, according to our estimate. In spite of the potential risks that would emerge as a result of an increase in supply from non-restricted provinces and restricted plants resuming production after the expiry of the policy in mid-Mar, the overall supply dynamics should remain fundamentally unchanged amid the government’s determination to improve the air quality. Meanwhile, as we believe the recent rebound in production volume and inventory levels was a front-running of the supply reduction policies, we foresee that if the trend reverses course it would lend support for the steel price.

Maintain Buy with price target maintain at HKD8.0 unchanged. The stock is currently trading at 0.9x FY17E PBR, which in our view is undemanding considering its improving earnings outlook and given that it is a laggard play. We maintain our price target at HKD8.0, based on 1.0x FY17E PBR, representing 12.7% upside potential, and thus maintain Buy.