Morningstar | Angang Steel Announces Acquisition of Angang Chaoyang; FVE Reduced to HKD 5.15 (CNY 4.35). See Updated Analyst Note from 18 Jul 2018
Angang Steel has announced that it will acquire a 100% stake in Angang Chaoyang, an integrated steel mill, from its parent company Angang Holding for CNY 5.9 billion. The rationale for this acquisition is for the company to expand its operation in China. We think the chances of this transaction going through are 50/50, and we have accordingly lowered our fair value estimate to HKD 5.15 (CNY 4.35) from HKD 5.30 (CNY 4.50) to factor in this possibility. Our no-moat and stable moat trend ratings on the firm are intact. Our lower fair value estimate is mainly due to the high valuation Angang is paying for Angang Chaoyang, which is partly offset by the improvement in earnings of the combined entity. Hence, we view this transaction as a slight negative. However, we note that this may be an easy way for the company to expand its steel production capacity, and that it could benefit from the deferred income tax asset of CNY 377 million that is held by the company. We still think that Angang Steel is overvalued at the current share price, as we believe the steel industry is highly commoditized and will continue to suffer from overcapacity issues.Angang Chaoyang has production capacity of 2 million tonnes and a net asset value of CNY 3.03 billion as at May 31, 2018. It generated net profit of CNY 1.03 billion and CNY 0.77 billion in 2017 and the first five months of 2018, respectively. However, these earnings were distorted by the recognition of deferred income tax assets by the company. If we assume China’s corporate tax rate of 25% for the company, adjusted net profit in 2017 and the first five months of 2018 would have been CNY 625 million and CNY 444 million, respectively. Based on its net asset value and adjusted net profit, Angang Chaoyang is being valued at 1.95 times price/book, 9.4 times 2017 P/E, and 5.5 times 2018 annualized P/E. This is significantly higher than Angang Steel’s 2018 P/B of 0.6 times, while largely in line with Angang Steel’s 2018 P/E.
This proposed acquisition is subject to shareholders' approval, which is expected to be held on Sept. 17, 2018.
Angang Steel Company Limited is a China-based company principally engaged in the production and distribution of steel. The Company's main products include hot-rolled steel sheet products, cold-rolled steel sheet products, medium and heavy sheets and other steel products. The Company distributes its products within domestic market and to overseas markets.
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