Steel Industry Outlook

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Metals & Mining Iron and Steel | Sector Update 1 February 2012
NEUTRAL
Company Ticker TP Rating
Angang Steel-H 347 HK HK$5.21 HOLD
Angang Steel-A 000898 CH RMB5.80 BUY
Maanshan I&S-H 323 HK HK$2.00 SELL
Maanshan I&S-A 600808 CH RMB2.60 HOLD
Baosteel-A 600019 CH RMB6.20 BUY

Where are we Different?
We include both bottom-up and top-down analyses
on demand forecasts.
We expect very slow demand growth at 2.8% YoY.
Our earnings forecasts for Angang and Maanshan
I&S are significantly below streets estimates

Key Highlights of this Report
Top-down and bottom-up demand analyses.
We see limited margin squeeze for steel mills in
near term.
Iron ore market outlook.

Key Catalysts/Events
Steel prices have dropped to the production cost.
Recent loosening of monetary policy could provide
impetus for steel traders in China, thus driving up
the overall demand.

BOCI Research Limited
Metals & Mining: Iron & Steel
Michelle Leung
(852) 3988 6431
michelle.leung@bocigroup.com

2012 Steel Industry
Outlook
Dim demand outlook with ST upside
Given our expectation that Chinas economy will inevitably enter an
era of slow growth in 2012 with prolonged tightening policies on the
property market, the steel industry can hardly remain immune. We
maintain our NEUTRAL rating on the sector as we see opportunities
for steel price rebounds in the near term due to: (i) steel prices
having dropped to the production cost level; (ii) the gradual
resumption of construction projects post-Chinese New Year (CNY);
and (iii) the recent loosening of monetary policy, which is providing
impetus for steel traders in China and thus driving up overall steel
demand. Angang remains our preferred stock for H shares and we
see Baosteel as our top pick for A shares.
Expecting Slow Demand Growth of 2.8% YoY in 2012
Overcapacity should remain a headache for steelmakers over the next two
years. Our bottom-up approach leads us to expect 2.2% YoY growth only,
much slower than FY11s almost 10% YoY growth.
Except for the home appliance and machinery sectors (for which we expect
10% YoY growth in steel consumption), demand from other sectors should rise
mildly while that from the construction sector should remain flat overall. The
outlook on exports remains dim due to the lack of incentives for steelmakers
and lacklustre demand. On the other hand, we believe crude steel capacity will
continue to expand by 30m tonnes (4% YoY) to 830m tonnes in 2012,
assuming 68.66m tonnes of new capacity and 30m tonnes of capacity
elimination.
Both ASP and Cost should Decline; Limited Room for Margin
Squeeze
Impacted by the economic slowdown and contracting property construction
market, we expect steel prices to fall 3-6% YoY and flat steel to outperform long
steel in 2012.
We believe iron ore import prices peaked out in 2011 due to a gradually
narrowing gap between global demand and supply. We project the Australian
benchmark price to fall 8% YoY in 2012.
In November 2011, the average net margin for major medium to large-size
steel mills was only 0.43% with the loss ratio expanding from 32.5% to 39%.
We expect steelmakers profitability to linger at a low level this year.
Chinas per capita steel consumption is still low at 445.2kg as compared with
many developed countries like Germany, Italy, Japan and South Korea. Given
Chinas relatively higher GDP and FAI growth potential, we believe there is still
room for higher per capita steel consumption.
Whats New in 12th 5-year Plan (5YP)?
While China missed its 11th 5-year Plan (5YP) target for consolidation, it
remains on top of the agenda in the 12th 5YP period, in which the government
aims to raise the top 10 concentration ratio from 49% in 2010 to 60% by 2015.
Crude steel demand should reach 750m tonnes by end-2015, implying a 3.7%
CAGR within FY11-15E.
Angang Steel Top Pick; Maintain SELL on Maanshan I&S (H)
We maintain HOLD on Angang H shares but upgrade A shares from HOLD to
BUY with new target prices of HK$5.21 and RMB5.80.
We like Angangs competitive edge in its dominant flat steel exposure.
The iron ore price retreat in 2H11 (around 9% HoH) should benefit Angangs
1H12 earnings due to its 6-month booking delay mechanism.

1 February 2012 2012 Steel Industry Outlook 2
This document may not be distributed in or into the PRC.
Table of Contents
2012 INVESTMENT STRATEGY AND VALUATION.......................... 3
2012 STEEL INDUSTRY OUTLOOK ............................................ 6
DEMAND ANALYSIS............................................................... 10
2012 IRON ORE PRICE OUTLOOK........................................... 21
EVALUATION OF 11
TH
5-YEAR PLAN ........................................ 26
WHAT IS NEW IN THE 12
TH
5-YEAR PLAN?.............................. 28
BRIEF REVIEW OF THE STEEL INDUSTRY IN 2011 ..................... 31
COMPANY ANALYSIS ............................................................. 39
COMPANY UPDATE
ANGANG STEEL ...................................................................... 41
MAANSHAN I&S...................................................................... 48
BAOSHAN I&S ........................................................................ 54
APPENDIX I. PRODUCTION FLOW CHARTS................................ 56
LISTED COMPANIES IN THIS REPORT....................................... 57

2012 INVESTMENT STRATEGY AND VALUATION
Sector Rating
We reaffirm our NEUTRAL rating on the steel sector (both H and A shares)
as we expect Chinas economy to enter an era of slow growth in 2012 and
believe the steel industry can hardly buck the effects. The recent sector rally
has already reflected the positives from the monetary loosening policies of
late and the potential gradual resumption of construction projects post-CNY.

Demand and Supply
We forecast crude steel capacity in China of around 830m tonnes in 2012. In
addition to the slim chances for a strong rebound in downstream demand
given the looming risks in the real estate and manufacturing industries, the
problem of oversupply should remain severe.

Pricing
Unless there are some loosening policies to stimulate demand, we see
Chinas steel prices remaining range-bound in 2012 due to weak demand.
Cost is expected to fluctuate at a high level and the profitability of steel mills
to come under an even more severe test. Industry earnings as a whole should
come to just above breakeven. The special steel industry should stand out
given the advances in Chinas industrialisation and increase in government
support during the 12th 5YP. In industrial countries, the output of special
steel usually accounts for 10-20% of crude steel output, while in China, it is
only about 5-10%. The output of middle and high-end special steel is even
more inadequate, and the industrialisation process will fuel the demand for
high-quality special steel going forward.
Within the steel universe, we prefer industry leaders possessing resources,
sound management and low exposure to the real estate sector. We also like
special steel companies as we believe they operate in a sweet spot under the
12th 5YP.

Valuation
While we maintain our NEUTRAL rating on the sector, we also reiterate our
HOLD rating on Angang Steel H shares but upgrade its A shares from HOLD
to BUY on valuation. We also reiterate SELL on Maanshan I&S H shares and
HOLD on its A shares. We prefer Angang to Maanshan I&S due to its higher
exposure to flat steel, which should recover sooner under the potential
government policy support. Having said that, we are still cautious on
oversupply in the steel industry although the loosening monetary policy
increases demand from traders and supports a short-term rally. The major H
and A-share steel stocks have average 2012 P/Bs of 0.53x and 0.9x,
respectively, relatively low levels historically.
The steel industry earnings as a whole
should come to just above breakeven in
2012

Figure 1. Valuations of Major H-share Steel Companies (as of 31 January 2012)
Stock code
Stock
code Ccy
Closing
price Mkt cap
EPS
(RMB)
EPS growth
(%)
P/E
(x)
P/B
(x)
ROE
(%)
Major H-share steel companies (m) 2010 2011E 2012E 2011E 2012E 2011E 2012E 2011E 2012E 2011E
Angang Steel. 347 HK HK$ 5.58 40,680 0.28 (0.32) 0.04 N/A N/A N/A 110.7 0.68 0.76 0.7
Chongqing I&S 1053 HK HK$ 1.21 5,073 0.01 0.02 0.05 - 150 65.6 29.8 0.32 0.33 (4.1)
Maanshan I&S 323 HK HK$ 2.68 23,425 0.14 0.04 0.04 (69) 0 50.8 50.8 0.62 0.62 1.2
Shougang Concord. 697 HK HK$ 0.54 4,835 0.09 0.05 0.09 (44) 80 11.7 7.2 0.44 0.41 3.5
IRC Corp 1029 HK HK$ 1.16 3,799 (0.04) 0.004 0.01 - 150 N/A 110.7 0.68 0.76 0.7
Average 42.7 49.6 0.52 0.53 0.3
Source: WIND Database, BOCI Research estimates

Figure 2. Valuations of Major A-share Steel Companies (as of 31 January 2012)
Stock code Stock code Ccy
Closing
price Mkt cap
EPS
(RMB)
EPS growth
(%)
P/E
(x)
P/B
(x)
ROE
(%)
Major A-share steel companies (m) 2010 2011E 2012E 2011E 2012E 2011E 2012E 2011E 2012E 2011E
Hebei I&S. 000709 CH RMB 2.99 14,607 0.21 0.18 0.20 (14) 11 15.9 14.4 0.6 0.6 4.0
SGIS Songshan 000717 CH RMB 2.73 3,057 0.01 0.02 0.11 60 450 135.5 24.6 0.8 0.7 0.6
Bengang Steel. 000761 CH RMB 4.62 12,996 0.30 0.30 0.34 2 13 15.8 14.0 1.0 0.9 6.0
Angang Steel 000898 CH RMB 4.58 32,991 0.28 (0.29) 0.065 N/A N/A N/A 70.5 0.69 0.79 0.2
Hunan Valin Steel Tube. 000932 CH RMB 2.87 3,140 (0.97) 0.02 0.15 - 650 140.0 18.7 0.6 0.6 0.4
Beijing Shougang 000959 CH RMB 2.87 3,220 0.12 0.03 0.05 (75) 67 89.0 53.4 1.1 1.0 1.2
Sansteel Minguang 002110 CH RMB 7.38 3,700 0.21 0.50 0.60 143 20 13.8 11.5 1.2 1.1 9.0
Wuhan I&S 600005 CH RMB 2.88 29,070 0.22 0.21 0.24 (3) 14 13.7 12.0 0.8 0.7 5.7
Baotou Steel. 600010 CH RMB 4.87 24,024 0.03 0.12 0.14 300 17 31.2 26.7 1.8 1.7 5.8
Baoshan I&S 600019 CH RMB 5.09 85,109 0.74 0.41 0.48 (45) 7 11.9 10.1 0.8 0.8 6.7
Jinan I&S 600022 CH RMB 3.42 10,516 0.03 0.03 0.05 11 67 112.3 67.4 1.4 1.5 1.3
Laiwu Steel 600102 CH RMB 7.14 1,664 0.13 0.32 0.35 139 9 23.4 20.3 1.1 1.0 4.7
Hangzhou I&S 600126 CH RMB 4.10 3,381 0.42 0.43 0.45 2 5 9.4 9.0 0.9 0.8 9.4
Lingyuan I&S 600231 CH RMB 5.34 4,398 0.74 0.60 0.64 (19) 7 9.1 8.5 1.1 0.9 11.6
Nanjing I&S 600282 CH RMB 2.87 4,734 0.24 0.22 0.261 (7) 19 12.8 10.8 1.0 0.9 7.8
Gansu Jiu Steel 600307 CH RMB 4.02 6,482 0.46 0.44 0.50 (4) 14 8.4 7.4 0.7 0.6 7.9
Anyang I&S 600569 CH RMB 2.73 6,295 0.03 0.05 0.08 67 60 52.6 32.9 0.6 0.6 1.1
Ba Yi I&S 600581 CH RMB 7.89 5,488 0.69 0.96 1.20 39 25 7.5 6.0 1.4 1.2 18.6
Xinhua Metal Products 600782 CH RMB 4.84 6,995 0.26 0.26 0.30 0 15 19.3 16.7 0.8 0.8 4.1
Maanshan I&S 600808 CH RMB 2.56 19,630 0.14 0.044 0.061 (68) (1) 58.2 58.2 0.7 0.7 2.2
Liuzhou I&S 601003 CH RMB 3.78 8,560 0.25 0.14 0.18 (43) 29 23.9 18.6 1.6 1.6 6.8
Chongqing I&S 601005 CH RMB 3.02 3,454 0.01 0.02 0.05 100 150 144.5 57.8 0.9 0.9 0.6
Average 14.2 12.3 1.0 0.9 7.9

Major A-share special steel and stainless steel companies
Daye Special Steel 000708 CH RMB 9.59 4,288 1.25 1.20 1.27 (4) 6 8.0 7.5 1.5 1.3 18.9
Xinxing Ductile Iron Pipes 000778 CH RMB 6.29 8,505 0.70 0.81 0.99 15 22 7.8 6.4 1.0 0.9 13.1
Shanxi Taigang Stainless Steel 000825 CH RMB 3.76 21,416 0.24 0.28 0.35 17 25 13.4 10.7 0.9 0.9 7.0
Shagang 002075 CH RMB 4.08 1,616 0.23 0.20 0.26 (12) 30 20.4 15.7 2.7 2.3 13.1
Jiuli Hi-tech Metals 002318 CH RMB 17.44 1,849 0.35 0.57 0.80 63 40 30.6 21.8 2.5 2.3 8.0
Zhongyuan Special Steel 002423 CH RMB 8.15 644 0.23 0.22 0.30 (4) 36 37.0 27.2 2.9 2.7 7.9
Xining Special Steel 600117 CH RMB 6.44 4,773 0.31 0.52 0.60 65 15 12.4 10.7 1.6 1.4 13.1
Fushun Special Steel 600399 CH RMB 4.02 1,816 0.06 0.04 0.07 (33) 75 100.5 57.4 1.2 1.2 1.2
Changli Auto Spring 600507 CH RMB 3.88 5,046 0.23 0.40 0.47 74 18 9.7 8.3 1.9 1.6 20.1
Average 6,785 0.47 0.57 0.68 31.2 22.3 14.6 11.6 1.7 1.5 13.3

Figure 3. Valuations of Major Global Steel Companies (as of 31 January 2012)
Stock code Company name Ccy
Closing
price
Mkt cap
(US$ m)
EPS
(Local ccy)
EPS growth
(%)
P/E
(x)
PB
(x)
ROE
(%)
2010E 2011E 2012E 2011E 2012E 2011E 2012E 2011E 2012E 2011E
MT NA Arcelormittal EUR 15.82 333,268 2.44 2.12 2.29 (13.2) 8.4 9.9 9.1 0.5 0.5 5.5
JSTL IN JSW Steel INR 687.75 485 72.11 64.26 51.01 (10.9) (20.6) 10.7 13.5 1.0 0.9 11.1
SESA IN Sesa Goa INR 211.6 582 28.59 48.43 34.32 69.4 (29.1) 4.4 6.2 1.4 1.2 40.1
ACC IN ACC Ltd INR 1197.75 711 59.28 58.63 68.22 (1.1) 16.4 20.4 17.6 3.3 2.9 16.7
HNDL IN Hindalco Industries INR 141.8 858 10.50 16.41 16.30 56.3 (0.6) 8.6 8.7 1.2 0.9 13.1
STLT IN Sterlite Industries India INR 114 1,211 11.33 14.41 16.10 27.2 11.7 7.9 7.1 0.9 0.8 11.7
SAIL IN Steel Authority of India INR 101.95 1,330 16.08 13.27 9.68 (17.5) (27.0) 7.7 10.5 1.1 1.1 14.1
TATA IN Tata Steel INR 443.85 1,345 (10.44) 64.98 50.37 (722.3) (22.5) 6.8 8.8 1.4 1.1 22.5
JSP IN Jindal Steel & Power INR 542.8 1,603 38.94 42.83 42.97 10.0 0.3 12.7 12.6 3.6 2.8 31.7
5711 JP Mitsubishi Materials Corp JPY 238 415 (54.56) 10.50 21.60 (119.3) 105.6 22.7 11.0 0.9 0.9 4.1
5406 JP Kobe Steel JPY 125 516 (2.69) 15.65 5.89 (681.5) (62.4) 8.0 21.2 0.7 0.7 8.8
5411 JP JFE Holdings JPY 1360 1,108 55.50 143.04 (21.63) 157.7 (115.1) 9.5 (62.9) 0.5 0.5 5.6
5401 JP Nippon Steel Corp JPY 187 1,688 (1.22) 15.63 5.46 (1,383.4) (65.1) 12.0 34.2 0.7 0.7 5.5
005490 KS Posco KRW 414,500 221 53,552 41,445 47,214 (22.6) 13.9 10.0 8.8 0.9 0.9 9.5
Global peer average (189.0) (13.0) 10.8 7.6 1.3 1.1 14.3

2012 STEEL INDUSTRY OUTLOOK
Overcapacity to Persist
While we expect Chinas economy to inevitably enter an era of slowing
growth in 2012, given the prolonged tightening policies over the property
market, the steel industry can hardly remain immune from the moderating
macro-economy.
We forecast crude steel demand will post significant growth slowdown to
2.8% YoY, totalling 667m tonnes in 2012. Output should rise 2.2% YoY to
697m tonnes, implying over 115m-133m tonnes of excess capacity,
equivalent to 14-16% of total production capacity. Our macro-economy team
expects FAI growth to slow from 23.8% in 2011 to 16-17% in 2012 and to
14-15% in 2013. We expect steel demand growth to follow a similar trend,
down from 8.8% in 2011 to 2.8% in 2012 (667m tonnes) and 3.2% in 2013
(705m tonnes). The costs of iron ore and other raw materials should hover at
high levels in 2012, but steel price averages should be slightly lower than
those in 2011. The profitability of steel companies appears even grimmer,
and the industry as a whole should continue to struggle along with meagre
profits.
Under the 12th 5YP for the steel industry, the top priority of the industrial
reform will be to improve the industrial concentration ratio, to tighten the
controls over steel resources in the upstream and to develop the special steel
and new material sectors.

Figure 4. BOCI Steel Demand and Supply Forecasts
(mt) 2005 2006 2007 2008 2009 2010 2011 2012E 2013E
Crude steel capacity 424 491 541 660 700 764 800 830 850
Changes 0 67 50 119 40 64 36 30 20
YoY growth 0% 16% 10% 22% 6% 9% 5% 4% 2%

Crude steel production 353 419 490 500 566 623 682 697 735
YoY growth 18.5% 16.9% 2.2% 13.1% 10.1% 9.5% 2.2% 5.5%
Capacity utilisation 83% 85% 91% 76% 81% 82% 85% 84% 86%

Imports of finished steel 26 19 17 15 18 16 16 16 16
Exports of finished steel 21 43 63 59 25 43 49 46 46
Net import/(export) 5 (25) (46) (44) (7) (26) (33) (30) (30)
Implied steel consumption 339 374 415 456 561 596 649 667 705
YoY growth 10.3% 10.7% 10.1% 22.9% 6.3% 8.8% 2.8% 3.2%
Source: Steelease, CU Steel, BOCI Research estimates

Our macro economy team expects FAI
growth to slow from 23.8% in 2011 to
16-17% in 2012 and to 14-15% in 2013.
We expect steel demand growth to
follow a similar trend

Figure 5. Steel Price Trend by Product (FY09-11)
3,000
3,500
4,000
4,500
5,000
5,500
6,000
6,500
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25mm Rebar 6.5mm wire rods
3mm HRC 1mm CRC
20mm medium and thick plate
(RMB/t)

Source: www.custeel.com, BOCI Research estimates

Figure 6. Steel Demand YoY Growth Trend by Product (2009-11)
-20%
0%
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40%
60%
80%
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Rebar Wire rods HRC
CRC Medium plate Galv and coated plate
Source: www.steelease.com, BOCI Research estimates

Crude Steel Capacity to Reach 830m tonnes in 2012E
China crude steel production capacity reached 764m tonnes by end-2010 and
approximately 800m tonnes by end-2011 according to our estimates that
take into consideration 61.36m tonnes of crude steel capacity additions and
around 25m tonnes of outdated capacity eliminations. By 2013, crude steel
capacity may reach 850m tonnes.
Based on our channel checks, there will at least be 30m tonnes of new
capacity commissioning in 2012. Within this, small-size mills will be the major
growth driver accounting for 74% of total new capacity in 2011-12. Long
steel capacity should rise sharply during 2012, with the newly-added capacity
for wire rod and rebar perhaps reaching 10.75m tonnes and 9.68m tonnes,
respectively, representing 9% and 6% of 2011E capacity. The capacity of
hot-rolled coil (HRC) and that of medium plate should increase by 10m
tonnes and 3m tonnes, respectively, representing 3.7% and 4.4% of 2011E
capacity. The newly-added capacity of cold-rolled coil (CRC) may reach 9m
tonnes in 2012, 5.2% of 2011E capacity.
Small-sized steel mills (1,000-2,000 cu
m) will be the major growth driver
accounting for 74% of total new
capacity in 2011-12

Figure 7. Capacity and Capacity Utilisation in China Steel Industry
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(mt)
Crude steel capacity (LHS) Capacity utilization (RHS)
(%)
Source: BOCI Research

Figure 8. Blast Furnaces Built in China (2010-12)
Quantity Design capacity
(mt)
1H10 12 18.18
2H10 26 41.75
HoH % 117 130
2010 38 57.23
1H11 18 23.13
2H11 27 41.46
HoH % 50 79
2011 45 64.59
YoY % 18.4 12.8
2012E and afterwards >20 >30.00
Source: www.custeel.com

Figure 9. New Production Lines and Capacity at Steel Mills (2011-12)
Type 2011 2012
Quantity Capacity Quantity Capacity
(mt) (mt)
Wire rod 15 lines 9.90 16 lines 10.75
Rebar 15 lines 11.85 8 lines 9.68
HRC 4 lines 8.40 5 lines 10.00
Medium plate 4 lines 7.30 1 line 3.00
CRC 33 lines 18.44 23 lines 9.00
Galvanised plate 12 lines 10.17 10 lines 4.85
Silicon steel 9 lines 2.60 6 lines 1.60
Total 92 lines 68.66 70 lines 48.88
Source: China United Steel

High Correlation between Output and Profitability
Based on the data range of 2002-11 as shown in Figure 10, we see a positive
correlation between steel industry profitability and steel output growth.
Given the poor profitability at present, we expect output growth to decelerate
in the near term. In November 2011, the total net profit of major large and
medium-sized enterprises amounted to RMB1.22bn with net margin as low as
0.43% and loss ratio (number of loss making enterprises/ total number of
enterprises) increasing to 39%.

Figure 10. Correlation between Chinas Total Crude Steel Production
Growth and Large & Medium-sized Steel Producers Net Margin
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
-25.0% -20.0% -15.0% -10.0% -5.0% 0.0% 5.0% 10.0% 15.0%
Net margin
YoY change in output
Source: WIND Database, BOCI Research

Figure 11. Chinas Total Crude Steel Production YoY Growth Mirrors Large
& Medium-sized Steel Producers Net Margin
-25%
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Net margin (LHS) YoY growth (RHS)

DEMAND ANALYSIS
Top-down Analysis
1. Limited room for large-scale monetary loosening
negative on steel demand
The increase in M2 supply implies higher liquidity, which triggers downstream
demand. Traders should have more working capital for restocking, thus
resulting in a decline in inventory. Although we saw more liquidity loosening
policies in 4Q11 (i.e. RRR cut to 21% in November, cash injection into the
market via reverse repo purchase, etc), the BOCI macro team sees limited
room for large-scale monetary loosening going forward given the excessive
quantitative easing in the US and Europe since 2009 and the high inflation
and property prices in China. Overall, the current neutral-to-relatively-tight
monetary policy looks set to shift toward a neutral one with partial loosening.

Figure 12. M2 Supply and YoY Steel Demand Highly Correlated
10
15
20
25
30
0
1
/
0
8
0
4
/
0
8
0
7
/
0
8
1
0
/
0
8
0
1
/
0
9
0
4
/
0
9
0
7
/
0
9
1
0
/
0
9
0
1
/
1
0
0
4
/
1
0
0
7
/
1
0
1
0
/
1
0
0
1
/
1
1
0
4
/
1
1
0
7
/
1
1
1
0
/
1
1
(20)
0
20
40
60
M2 supply YoY growth (LHS) Steel demand YoY growth (RHS)
YoY growth (%) YoY growth (%)

Figure 13. M2 Supply and YoY Steel Inventory Growth Highly Correlated
10
15
20
25
30
0
1
/
0
8
0
4
/
0
8
0
7
/
0
8
1
0
/
0
8
0
1
/
0
9
0
4
/
0
9
0
7
/
0
9
1
0
/
0
9
0
1
/
1
0
0
4
/
1
0
0
7
/
1
0
1
0
/
1
0
0
1
/
1
1
0
4
/
1
1
0
7
/
1
1
1
0
/
1
1
-20%
0%
20%
40%
60%
80%
100%
120%
M2 supply YoY growth (LHS) Steel inventory YoY growth (RHS)
YoY growth (%) YoY growth (%)

BOCI macro team sees limited room for
large-scale monetary loosening going
forward given the excessive quantitative
easing in the US and Europe since 2009
and the high inflation and property
prices in China

2. Close relationship between FAI and steel demand; BOCI
expects FAI growth to slow to 16-17% in 2012 from
23.8% in 2011
We found that the correlation coefficient between steel demand and FAI has
been as high as 69%, based on data over the past four years. As such, we
factor the FAI growth forecasts into our steel demand growth projections.
Our macro-economy team expects FAI growth to slow from 23.8% in 2011 to
16-17% in 2012 and 14-15% in 2013, and we expect steel demand to follow
a similar trend, dropping from 8.8% in 2011 to 2.8% in 2012 and 3.2% in
2013 (to 667m tonnes and 705m tonnes, respectively).

Figure 14. FAI and Finished Steel Demand (2007-11)
0
500
1,000
1,500
2,000
2,500
3,000
3,500
0
2
/
0
7
0
5
/
0
7
0
8
/
0
7
1
1
/
0
7
0
3
/
0
8
0
6
/
0
8
0
9
/
0
8
1
2
/
0
8
0
4
/
0
9
0
7
/
0
9
1
0
/
0
9
0
2
/
1
0
0
5
/
1
0
0
8
/
1
0
1
1
/
1
0
0
3
/
1
1
0
6
/
1
1
0
9
/
1
1
(RMB bn)
30
40
50
60
70
80
(m tonnes)
Monthly FAI (LHS) Monthly steel demand (RHS)
Source: NDRC, www.steelease.com, BOCI Research

Figure 15. Regression Analysis of FAI and Finished Steel Demand
(2007-10)
y = 0.0145x + 29.561
R
2
= 0.7105
30
40
50
60
70
80
90
- 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000
(m tonnes)
Source: NDRC, www.steelease.com, BOCI Research

3. Steel demand highly correlated to urbanisation
We find a distinct correlation between steel demand and urbanisation based
on data accumulated over the past 58 years. As shown in Figure 17, the
positive correlation between steel demand growth and urbanisation (i.e.
urban population growth) cannot be denied. Under the government policy of
encouraging at least a 1ppt increase in urbanisation each year, steel demand
should find gradual growth support going forward.

Strong correlation coefficient between
steel demands and FAI with coefficient
at 69%

Figure 16. Steel Demand Growth and Urbanisation Rate Follow Similar
Trend
0%
10%
20%
30%
40%
50%
60%
1
9
5
7
1
9
6
5
1
9
7
5
1
9
7
9
1
9
8
2
1
9
8
6
1
9
8
8
1
9
9
0
1
9
9
2
1
9
9
4
1
9
9
6
1
9
9
8
2
0
0
0
2
0
0
2
2
0
0
4
2
0
0
6
2
0
0
8
2
0
1
0
0
100
200
300
400
500
600
700
(m tonnes)
Urbanization rate (LHS) Crude steel demand (RHS)

Figure 17. Urbanisation Rate and Crude Steel Demand Highly Correlated
y = 1545.6x - 312.18
R
2
= 0.8009
(100)
0
100
200
300
400
500
600
700
0% 10% 20% 30% 40% 50% 60%
(m tonnes)


Long-term View: Upside for Per-capita Steel Consumption
in China
Although the demand outlook in most steel downstream sectors looks dour in
2012, its lower average per capita consumption of steel compared with
developed countries indicates upside for per capita steel use in China.
China registered the fastest growth of steel use per capita in the world during
the past decade (14% CAGR to 445.2kg). Still, national per capita
consumption remains well below that of developed countries such as
Germany, Italy, Japan and South Korea. Given Chinas rapid growth in GDP
and FAI, we believe there is further upside for steel consumption in the long
term.

Further upside for per capita steel
consumption in China in long term

Figure 18. Apparent Crude Steel Use
0
200
400
600
800
1,000
1,200
C
a
n
a
d
a
U
S
G
e
r
m
a
n
y
I
t
a
l
y
J
a
p
a
n
S
.

K
o
r
e
a
T
a
i
w
a
n
A
s
i
a
C
h
i
n
a
I
n
d
i
a
N
.

A
m
e
r
i
c
a
S
.

A
m
e
r
i
c
a
A
f
r
i
c
a
F
r
a
n
c
e
E
U

(
1
5
)
E
U

(
2
7
)
O
t
h
e
r

E
u
r
o
p
e
R
u
s
s
i
a
C
.
I
.
S
kg/capita
Country
Global average
Source: World Steel Association, BOCI Research

Figure 19. Apparent Crude Steel Use
0
200
400
600
800
1,000
1,200
1,400
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
kg/capita
Canada US Germany Italy Japan
S. Korea Taiwan Asia China
Source: World Steel Association, BOCI Research

Bottom-up Analysis: Growth Slowdown in Downstream
Industries
Gauging the downstream industries in 2012, we reckon the downside risk of
the property sector will intensify and the growth potential for automotives,
machinery and other manufacturing industries will be small. We roughly
forecast the total crude steel demand by analysing each downstream
industry that entails demand for crude steel and sum them up. Generally
speaking, under the overall situation of slowing FAI growth for the
construction industry, the growth rates of crude steel demand and output will
see a notable YoY pullback. We forecast crude steel demand and crude steel
output picking up 2.8% YoY and 2.2% YoY to 667m tonnes and 697m tonnes
in 2012, and growing 3.2% YoY and 5.5% YoY to 705m tonnes and 735m
tonnes in 2013. Our detailed analysis is as follows.

Figure 20. Demand and Output Forecasts by Industry
Industry 2011E 2012E 2013E
Actual consumption (mt)
Construction 301.90 301.90 310.96
Transportation (incl. expressways, bridges, ports and rail) 41.59 44.09 46.29
Resources and energy (incl. minerals, oil & gas and
electricity)
51.75 54.86 59.25
Machinery 108.72 115.24 124.46
Automotive 47.34 49.24 51.21
Shipbuilding 17.72 18.07 18.43
Light industry (incl. household appliances and ironware) 28.73 29.88 31.67
Others 51.00 53.55 62.72
Aggregate consumption (mt) 649 667 705
YoY change (%) 8.8% 2.8% 3.2%
Net export (mt) 33.0 30.0 30.0
Output (mt) 682 697 735
YoY change (%) 9.5% 2.2% 5.5%
Total capacity 800 830 850
Capacity utilisation 85.3% 83.9% 86.4%
Source: BOCI Research estimates

Marked Deceleration in Urban FAI Growth
According to BOCIs macro economy team, the year-on-year growth rate of
FAI will fall to around 17% in 2012E from 23% in 2011. The correction in the
property sector looks set to continue, and property investment growth may
fall to 5-8% from 25-30% in 2011. In addition, the marked decrease in land
transfer income will drag down local government finances and weigh on the
expansion of infrastructure investment. Meanwhile, a modest pullback is
expected in manufacturing industry investment. However, investment in
agriculture and social undertakings will maintain robust growth going
forward.

Figure 21. Urban FAI
0
50,000
100,000
150,000
200,000
250,000
300,000
0
7
/
0
1
0
7
/
0
5
0
7
/
0
9
0
8
/
0
1
0
8
/
0
5
0
8
/
0
9
0
9
/
0
1
0
9
/
0
5
0
9
/
0
9
1
0
/
0
1
1
0
/
0
5
1
0
/
0
9
1
1
/
0
1
1
1
/
0
5
1
1
/
0
9
0
5
10
15
20
25
30
35
40
Urban FAI (LHS) Cumulative YoY growth (RHS)
(RMB bn) (%)
Source: WIND, BOCI Research

BOCI estimates FAI YoY growth rate will
fall to around 17% in 2012 from 23% in
2011

Intensifying Downside Risk for Property Sector; Social
Security Housing to Ensure Steel Demand
In terms of real estate investment, the BOCI property team estimates that
investment growth in 2011 should have fallen by 26-29%. Specifically, the
year-on-year growth of real estate investment in 11M11 slowed further
compared with 10M11, and in November alone, it fell 4.9ppts MoM, marking
historical low levels for September, October and November. Along with the
confirmation of the deceleration trend, the growth of sales also contracted.
Moreover, the National Real Estate Climate Index fell below the 100 line for
the first time since July 2009, further suggesting the persisting downtrend in
fundamentals. In 2012, the downside risk in property should intensify. Our
property team believes the purchase restrictions, lending curbs and other
core adjustments and control policies will remain tight.
Given the overall slowdown of real estate investment, the construction of
social security housing will likely provide key support for building material
demand. The Ministry of Housing and Urban-Rural Development (MOHURD)
recently released its 2012 target for new social housing project starts (more
than 7m units) along with a completion target of 5m units, higher than the
target of around 3.3m units for 2011. The master plan for social security
housing under the 12th 5YP remains at 36m new units. We also see the
government stepping up efforts to monitor social housing construction
projects throughout the 12th 5YP period.

Figure 22. Commercial Housing Investment Figure 23. New Construction Area
0
10,000
20,000
30,000
40,000
50,000
0
1
/
0
5
0
5
/
0
5
0
9
/
0
5
0
1
/
0
6
0
5
/
0
6
0
9
/
0
6
0
1
/
0
7
0
5
/
0
7
0
9
/
0
7
0
1
/
0
8
0
5
/
0
8
0
9
/
0
8
0
1
/
0
9
0
5
/
0
9
0
9
/
0
9
0
1
/
1
0
0
5
/
1
0
0
9
/
1
0
0
1
/
1
1
0
5
/
1
1
0
9
/
1
1
0
5
10
15
20
25
30
35
40
45
Property development investment (LHS)
Cumulative YoY growth (RHS)
(RMB bn) (%)

0
50,000
100,000
150,000
200,000
0
1
/
0
5
0
6
/
0
5
1
1
/
0
5
0
4
/
0
6
0
9
/
0
6
0
2
/
0
7
0
7
/
0
7
1
2
/
0
7
0
5
/
0
8
1
0
/
0
8
0
3
/
0
9
0
8
/
0
9
0
1
/
1
0
0
6
/
1
0
1
1
/
1
0
0
4
/
1
1
0
9
/
1
1
(20)
0
20
40
60
80
New construction area (LHS) Cumulative YoY growth (RHS)
(10,000sqm) (%)

Source: WIND Database


Auto Industry still Lacklustre
Affected by the tightening of government policies in China, the wilting global
economy and the sharp decrease in Japanese car production after the
earthquake in March 2011, the growth in China steel demand (i.e. galvanised
sheet and CRC) from the auto industry recorded a notable slowdown in 2H11
while automobile output growth dropped from 144% YoY in 1M10 to only
3.8% YoY in 11M11. The BOCI auto team reckons that the industry grew
around 4% in 2011 and will remain weak throughout 2012.

The National Real Estate Climate Index
fell below the 100 line for the first time
since July 2009, further suggesting the
downtrend in fundamentals will persist
The BOCI auto team reckons that the
auto industry grew around 4% in 2011
and will remain weak throughout 2012

Figure 24. Monthly Auto Sales Volume Figure 25. Monthly Auto Output
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2007 2008 2009 2010 2011

0
50
100
150
200
250
0
1
/
0
6
0
5
/
0
6
0
9
/
0
6
0
1
/
0
7
0
5
/
0
7
0
9
/
0
7
0
1
/
0
8
0
5
/
0
8
0
9
/
0
8
0
1
/
0
9
0
5
/
0
9
0
9
/
0
9
0
1
/
1
0
0
5
/
1
0
0
9
/
1
0
0
1
/
1
1
0
5
/
1
1
0
9
/
1
1
(40)
(20)
0
20
40
60
80
100
120
140
160
Monthly value (LHS) YoY growth rate for the month (RHS)
(10,000 vehicles) (%)

Source: NBS, BOCI Research

Source: NBS, BOCI Research

Slowing Overall Growth of Engineering Machinery
The relatively tight monetary policy in 2011 caused a slowdown in many
engineering projects, thus affecting demand for machinery. Excavator sales
showed a year-on-year decrease in July and the annual growth rate of crane
sales slumped in August and September. According to the BOCI machinery
equipment team, the overall growth in the machinery sector in 2012 will
recede somewhat to around 15%. Within this, engineering machinery sales
are expected to grow only 5-10%.

Figure 26. Cranes
Figure 27. Excavating, Bulldozing and Transport
Equipment Sales
0
100
200
300
400
500
600
700
800
0
1
/
1
0
0
2
/
1
0
0
3
/
1
0
0
4
/
1
0
0
5
/
1
0
0
6
/
1
0
0
7
/
1
0
0
8
/
1
0
0
9
/
1
0
1
0
/
1
0
1
1
/
1
0
1
2
/
1
0
0
1
/
1
1
0
2
/
1
1
0
3
/
1
1
0
4
/
1
1
0
5
/
1
1
0
6
/
1
1
0
7
/
1
1
0
8
/
1
1
0
9
/
1
1
1
0
/
1
1
1
1
/
1
1
(30)
(20)
(10)
0
10
20
30
40
50
60
Monthly output (LHS) YoY growth rate for the month (RHS)
(units) (%)

0
10
20
30
40
50
60
70
0
1
/
1
0
0
2
/
1
0
0
3
/
1
0
0
4
/
1
0
0
5
/
1
0
0
6
/
1
0
0
7
/
1
0
0
8
/
1
0
0
9
/
1
0
1
0
/
1
0
1
1
/
1
0
1
2
/
1
0
0
1
/
1
1
0
2
/
1
1
0
3
/
1
1
0
4
/
1
1
0
5
/
1
1
0
6
/
1
1
0
7
/
1
1
0
8
/
1
1
0
9
/
1
1
1
0
/
1
1
1
1
/
1
1
(40)
(20)
0
20
40
60
80
100
120
140
(units) (%)



Figure 28. Excavators Figure 29. Concrete Machinery
0
5
10
15
20
25
30
0
1
/
1
0
0
2
/
1
0
0
3
/
1
0
0
4
/
1
0
0
5
/
1
0
0
6
/
1
0
0
7
/
1
0
0
8
/
1
0
0
9
/
1
0
1
0
/
1
0
1
1
/
1
0
1
2
/
1
0
0
1
/
1
1
0
2
/
1
1
0
3
/
1
1
0
4
/
1
1
0
5
/
1
1
0
6
/
1
1
0
7
/
1
1
0
8
/
1
1
0
9
/
1
1
1
0
/
1
1
1
1
/
1
1
(60)
(40)
(20)
0
20
40
60
80
100
120
140
(units) (%)

0
10
20
30
40
50
0
1
/
1
0
0
2
/
1
0
0
3
/
1
0
0
4
/
1
0
0
5
/
1
0
0
6
/
1
0
0
7
/
1
0
0
8
/
1
0
0
9
/
1
0
1
0
/
1
0
1
1
/
1
0
1
2
/
1
0
0
1
/
1
1
0
2
/
1
1
0
3
/
1
1
0
4
/
1
1
0
5
/
1
1
0
6
/
1
1
0
7
/
1
1
0
8
/
1
1
0
9
/
1
1
1
0
/
1
1
1
1
/
1
1
(20)
(10)
0
10
20
30
40
50
60
70
(units) (%)



Home Appliance Sector Growth Holds Steady
The home appliance industry showed an overall growth slowdown in 2011.
The cumulative year-on-year growth for refrigerator, washing machine and
air conditioner sales in 11M11 came in at 19.24%, 13.03% and 26.59%,
respectively. Following the gradual dissipation of policy effects, we believe
the growth rate already peaked out in 2011 and is now steady. Assessing the
market demand for durables in 2012, we see urban demand from renewals
and the rural market remaining the major growth drivers ahead. Overall, the
already high penetration rate of refrigerators and washing machines and
negative impact of the struggling property market could continue to put the
home appliance sector under pressure in 2012. That said, premier Wen
Jiabaos 3 January 2012 speech indicated the governments plan to bolster
domestic demand, which could boost the household durables industry going
forward, in our view. The BOCI consumer product team forecasts 7.8%
growth in air conditioner sales and around 3% growth in refrigerator and
washing machine sales this year.

Figure 30. Output of Automobile and Household Durables in 2010 and
11M11
2010 11M11
Cumulative
output
Cumulative
growth
Cumulative
output
Cumulative
growth
(m units) (YoY %) (m units) (YoY %)
Automobiles 18.3 32.4 14.0 4.5
Air conditioners 10.9 34.9 11.3 26.6
Washing machines 62.1 27.14 48.3 13.0
Refrigerators 73.0 23.1 68.3 19.2

The BOCI consumer product team
forecasts 7.8% growth in air conditioner
sales and around 3% growth in
refrigerator and washing machine sales
this year

Figure 31. Air Conditioners Figure 32. Refrigerators
0
500
1,000
1,500
2,000
0
1
/
0
6
0
5
/
0
6
0
9
/
0
6
0
1
/
0
7
0
5
/
0
7
0
9
/
0
7
0
1
/
0
8
0
5
/
0
8
0
9
/
0
8
0
1
/
0
9
0
5
/
0
9
0
9
/
0
9
0
1
/
1
0
0
5
/
1
0
0
9
/
1
0
0
1
/
1
1
0
5
/
1
1
0
9
/
1
1
(60)
(40)
(20)
0
20
40
60
80
100
120
Value for the month (LHS) YoY for the month (RHS)
(10,000 units) (%)

0
200
400
600
800
1,000
0
1
/
0
6
0
5
/
0
6
0
9
/
0
6
0
1
/
0
7
0
5
/
0
7
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Figure 33. Washing Machines
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Acute Slowdown in Railway Investment
At the national railway working conference held on 23 December 2011,
railway minister Sheng Guangzhu stated that around RMB500bn will be
invested in railway transportation in 2012 (including RMB400bn for
infrastructure construction), representing around 6.6% YoY growth. This
would go toward building a total length of 45,000km in high-speed railways
and 83,000km in expressways.
According to the Ministry of Railways, railway FAI amounted to RMB491.6bn
in 11M11 (a decrease of 28.4% YoY), including RMB396.3bn in infrastructure
construction investment (down 34.7% YoY).

Figure 34. Railway FAI
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FAI in railway transport (LHS) Cumulative YoY growth (RHS)
(RMB bn) (%)

Exports should Remain Stable
Bogged down by the sovereign debt crisis, the European economy suffered
an acute downturn in 2011. It even sparked similar situations in South Africa
and some other underdeveloped countries. In 2012, the global economy
should continue to encounter difficulties and uncertainties. The president of
the IMF has recently stated that the growth rate of the global economy in
2012 is now estimated at less than 4%. Given the dim demand in the US and
Europe amid the high-cost environment, the exports of Chinese steel face
quite a grim situation.
We expect Chinas 2012 steel exports to fall 6% YoY to 46m tonnes due to (i)
the weak demand overseas and (ii) the lack of incentives due to the discounts
in export prices. According to steelease.com, the steel exports premium for
major steel products were mostly negative as of October 2011 as shown in
Figure 35.

Figure 35. Export Premium of HRC and Wire Rod
(200)
(100)
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400
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HRC Wire rod
Source: www.steelease.com, BOCI Research

The continuously negative export
premium for HRC in 2011 implies little
incentive for exports

Slight Drop in Steel Price in 2012E Compared with 2011
After a sustained and pronounced fall, the steel price will remain low and
steel inventory will stay high in 2012E. To sum up our judgment of the supply
and demand situation in the steel market, we expect a slight decline in the
average steel price and greater fluctuations in 2012 than in 2011. Meanwhile,
we reckon that a boost in demand is likely post-CNY, and the construction
ramp-up for social security housing in 3Q11 could provide a boost to the steel
price.

Figure 36. Steel Price Forecasts
Category Rebar Wire rod HRC CRC Medium plate
Avg. price YoY Avg. price YoY Avg .price YoY Avg. price YoY Avg. price YoY
(RMB/t) (%) (RMB/t) (%) (RMB/t) (%) (RMB/t) (%) (RMB/t) (%)
2012E 4,450 (6) 4,485 (6) 4,438 (5) 5,352 (3) 4,513 (5)
2011 4,734 13 4,771 12 4,672 10 5,518 (2) 4,750 8
2010 4,179 4,253 4,251 5,606 4,384
Source: www.custeel.com, BOCI Research

Figure 37. Steel Inventory
0
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Total inventory Long steel Flat steel
(mt)

2012 IRON ORE PRICE OUTLOOK
Expect Iron Ore Price to Drop Slightly but Remain High
Looking ahead, against the general backdrop of escalating output at
domestic mines, increasing sources of iron ore imports and output ramp-ups
at the three big mines, the middle and long-term iron ore price should show
a gradual downtrend. However, an abrupt correction is unlikely given that:
1. China will remain a net importer of iron ore, providing important
support to seaborne demand;
2. The three big mines will continue to enjoy dominant market shares;
3. Iron ore exporting regions may adopt policies such as raising resource
taxes and tariffs, which could reduce the seaborne supply.
While major global mines will not ramp up capacity all in one go, we believe
iron ore prices will still fluctuate at a high level, providing a limited boost for
steel mill profits.

Iron Ore Prices to Decline 8% YoY in 2012E
In short, we expect China spot iron ore to decrease at an annual rate of
8-13% during 2012-15 due to the gradually narrowing gap between global
demand and supply because: (i) large international miners continue to ramp
up their production capacities; and (ii) world iron ore consumption is forecast
to register growth slowdown during 2012-15, accordingly to CRU. We
forecast the price will average US cents 240/dmtu in 2012, US cents
220/dmtu in 2013, US cents 195/dmtu in 2014, and US cents 170/dmtu in
2015. Our long-term price assumption is US cents 121/dmtu.

Figure 38. Iron Ore Price Assumptions
2011A 2012E 2013E 2014E 2015E LT
Australian (Fe% 62) (US$/t) 161 149 136 121 105 75
YoY growth (%) (8) (8) (11) (13) (29)
China spot (62%) (US$/t) 167 158 150 133 125 90
YoY growth (%) (5) (5) (11) (6) (28)
Source: Bloomberg, BOCI Research estimates

Figure 39. Average Price of China Import Ore Fines (62% Fe) by Quarter (US$/tonne)
1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 YTD
70.2 68.7 87.3 96.8 131.6 159.2 137.4 159.1 178 175.5 175.9 140.8 139.9
Source: Bloomberg, BOCI Research estimates

Figure 40. Contract Prices Calculated Based on Platts Index
Quarter Price US$/tonne QoQ change (%)
4Q10 137 -
1Q11 149 8.8
2Q11 179 20.1
3Q11 177 (1.2)

Actual
4Q11 160 (9.6)

Priced based on Platts Index
4Q11 176 (0.8)
Source: Bloomberg, BOCI Research

Figure 41. International Long-term Contract Prices (1988-2009)
10
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CVRD Itabira ore fines Rio Tinto 65% Hamersley ore fines
(US$/tonne)

Figure 42. Platts Price Data (2010-present)
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Figure 43. Domestic Iron Ore Output
Figure 44. Investment in Ferrous Metals Mining and
Dressing
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Figure 45. Iron Ore Inventory at Port
3,000
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Figure 46. Top 5 Sources of PRC Iron Ore Imports
Country 2007 2007 2008 2008 2009 2009 2010 2010
(mt) Import
volume
% of total PRC
iron ore imports
Import
volume
% of total PRC
iron ore imports
Import
volume
% of total PRC
iron ore imports
Import
volume
% of total PRC
iron ore imports
Australia 145.6 38 183.4 41.3 261.9 41.7 265.3 42.9
Brazil 97.6 25.5 100.6 22.7 142.4 22.7 130.9 21.2
India 79.4 20.7 91 20.5 107.3 17.1 96.6 15.6
South Africa 12.2 3.2 14.5 3.3 34.1 5.4 29.5 4.8
Iran 5 1.3 5.1 1.2 6.9 1.1 14.6 2.4
Source: China Customs, BOCI Research

Figure 47. Growth Forecasts for 3 Major Mining Companies
(000
tonnes) Vale Rio BHP Total
% of
global
total
Output Chg (%) Output Chg (%) Output Chg (%) Output Chg (%) (%)
2005 23,385 10.70 12,449 15.50 9,750 9.40 45,584 11.70 30.6
2006 26,416 13.00 13,278 6.70 9,907 1.60 49,601 8.80 29.0
2007 29,903 13.20 14,470 9.00 10,288 3.80 54,661 10.20 28.6
2008 30,170 0.90 15,339 6.00 11,752 14.20 57,261 4.80 27.6
2009 23,010 (23.70) 17,154 11.80 11,779 0.20 51,943 (9.30) 27.2
2010 30,778 33.80 18,462 7.60 12,505 6.20 61,745 18.90 28.3
2011E 33,950 10.30 19,490 5.60 14,340 14.70 67,780 9.80 28.8
2012E 38,870 14.50 21,200 8.80 15,480 7.90 75,550 11.50 30.7
2013E 44,900 15.50 24,500 15.60 17,000 9.80 86,400 14.40 34.2
2014E 47,500 5.80 27,800 13.50 18,600 9.40 93,900 8.70 37.8
2015E 48,500 2.10 29,000 4.30 20,000 7.50 97,500 3.80 38.4

Figure 48. Major Mining Companies 2011-15 Capacity Expansion Plans
Company Country Project Capacity Year put into operation Investment
(mt) (US$ bn)
Vale Brazil Carajas+10M 10 2011 0.29
Carajas+30M 30 2012 2.5
Carajas+Serra Sul 90 2013+ 11.3
Concalcao Itabirito 12 2012 1.2
Vargam Grando Itabirito 10 2012 0.98
Blh Tubarao Pellet 7.5 2011+ 0.64
Corumba to 12.8mtpy 10.8 2012+ 0.22
Corumba to 23.2mtpy 10.4 2013+ 0.22
Malaysia Concoptual Project 7 2013+ 1.0
Rio Australia Brockman4 22 2010+ 1.52
Mesa A Worrarnboo 25 2010+ 0.99
Westen Tumper Synclina 29 2011 0.14
Hope downs 4 30 2012+ -
Guinea Simandou 70 2013+ 5.
Canada IOC Concentrate Stg1 5 2011+ 0.5
Funnor Concentrate Stg2 3 2011+ 0.3
India Orissa 5 2013+ -
BHP Australia RPG-4 28 2011 2.2
RPG-5 50 2011+ 5.6
RPG-5 and Quantum 36 2012+ 4
Anglo Brazil Minas Rio-phase 1 25 2013+ 5
Minas-Rio expansion TBD TBD TBD
S. Africa Kolomela (previously Sishen South) 9 2012+ 1.1
Sishen Expansion Project 1 1 2011 -
Sishen Expansion Project 2 10 2015 -
Sishen Concentrate 2 2015 -
FMG Australia Solomon Stage1 40 2013 -
Solomon Stage2 20 2015 -

Coking coal, the second largest cost component in steel production (avg.
>20% of total cost) should also fall in 2012 given the price drag from import
prices amid the softening demand. Our energy team forecasts 2% YoY and
4% YoY declines in 2012 and 2013, respectively.

Figure 49. Liulin Coal Price
2009 2010 2011 2012E 2013E
Spot mine mouth price for #4 coal at Liulin
(RMB/t)
746 833 1007 984 941
YoY growth (%) (18) 12 21 (2) (4)
Source: www.sxcoal.com, BOCI Research estimates

Positive: Limited Room for Significant Price Cut in near
term
Considering medium/large steelmakers almost breakeven profitability level
of only 0.43% (net margin) in November, we believe the room for a further
price cut could be limited assuming iron ore prices to stay at relatively high
levels. We have conducted a study regarding the corresponding production
cost assuming different iron ore price levels. In Angangs case, we believe its
HRC product has already been running at a negative gross margin, thus
implying limited room for a significant price cut.

Figure 50. Scenario Analysis for Angang Steels HRC Gross Margin (2011)
Iron ore price
(US$/tonne) CIF Coking coal
HRC production
cost
Angang's HRC
market price Gross margin
(RMB/tonne) (RMB/tonne) (RMB/tonne) (%)
116 1,000 3,375 3,650 8
120 1,000 3,425 3,650 7
130 1,000 3,523 3,650 4
136 1,000 3,585 3,650 2
140 1,000 3,626 3,650 1
150 1,000 3,817 3,650 (4)
160 1,000 3,978 3,650 (8)
Source: Company data, BOCI Research estimates
*highlighted is the base case

EVALUATION OF 11
TH
5-YEAR PLAN
Targets vs. Outcome
1) Lower reliance on imports - Success
During the 11th 5YP, Chinas crude steel production increased from 350m
tonnes to 623m tonnes (representing a CAGR of 12.2%), successfully
reducing the import ratio from 8% to 3%. Meanwhile, the country has also
turned from a net importer into a net exporter as it has successfully raised the
self-sufficiency ratio for auto-manufacturing and shipbuilding products.

2) Production efficiency - Success
The fresh water consumption per tonne of steel production declined from
8.03 tonnes to 4.43 tonnes during the 11th 5YP period, while coal
consumption per tonne of steel dropped from 741kg to 619kg. During the
11th 5YP period, China eliminated 111.7m tonnes iron casting and 66.8m
tonnes of steel smelting capacity, meeting Beijings target of 100m tonnes
and 55m tonnes, respectively.

3) Industry consolidation- Failure
By 2010, the concentration ratio of Chinas top 10 producers stood at 48.6%.
Although this was a 5.1ppt YoY improvement, it failed to achieve the MIIT's
concentration target of >45% for the top 5 by 2009. We see mixed results for
the acquisition plans. There were successful cases like Baoshans acquisition
of Bayi Steel and Ningbao I&S, the large-scale consolidation of Hebei I&S;
Shagangs consolidation of Huaiyin Steel Group and the merger of Henan
Anyang and Yongxing I&S, for example. However, some large-scale deals
have yet to reach fruition, such as Angang and Bengang.
According to 12
th
5YP for the steel industry, the government will focus on
promoting the mergers of Angang Steel and Pangang Steel, Benxi I&S and
Sanming I&S, Baosteel and Guangdong I&S, Wuhan I&S and various steel
enterprises in Yunnan and Guangxi, along with Shougang and a few steel
enterprises in Jilin, Guizhou and Shanxi.
Overall, unless new policies are launched in order to speed up the industry
consolidation, steel mills in general will face a lack of incentives given the
poor profitability, according to our channel checks.

MIIT has been correct in forecasting steel consumption
under the 11
th
5YP
During the 11
th
5YP, the MIIT accurately forecast the CAGR for crude steel
consumption at 10-12% vs. 12% actual growth. This time, the MIIT expects
a much slower CAGR of 3.2% under the 12
th
5YP, compared to our 4-5% YoY
growth expectation in 2012-13.

Government must Step up Consolidation Process
Three key reasons lead us to believe that industry consolidation must speed
up (thus benefiting large players). China must raise its industry concentration
ratio in order to:
1. Enjoy stronger bargaining power at the iron ore negotiation table,
which is very important given the threat from the merger of Rio Tinto
and BHP, as the merged entity would control over 30% of global iron
ore production. Around 39.1% of iron ore consumed in China was
sourced overseas in 2011, slightly higher than 2010s 36.7%.
2. Resolve the crucial problem of overcapacity. Currently, around 70% of
steel production comes from small and medium-sized mills.
3. Improve overall operational efficiency to reduce pollution and minimise
waste of raw materials.

WHAT IS NEW IN THE 12
TH
5-YEAR PLAN?
Continuity of Steel Industry Reform in 2012
At end-2011, China unveiled the 12th 5YPs for the iron & steel industry, the
new materials industry and the mineral resources industry. Key points are as
follows:
12
th
5YP for steel
a) Efforts must be made to enhance product quality and reduce the
reliance on imports;
b) Regions to receive more support in terms of industry optimisation
include the south-eastern coastal areas and the western region.
The government targets a 60% market concentration ratio for the
top 10 by end-2015;
c) Crude steel output growth to decelerate and the volume of
domestic consumption to amount to 750m tonnes by 2015,
implying a 3.7% CAGR during FY11-15E;
d) Facilitating local steel mills to acquire iron ore resources overseas.
12
th
5YP for new materials
a) By 2015, the self-sufficiency ratio of new materials should reach
70%.
b) Areas to receive official support include steel for high-speed rail,
high magnetic-induction grain-oriented silicon steel,
corrosion-resisting steel for the shipbuilding industry,
low-temperature pressure vessel plates, high pressure boiler
tubes for the power sector, high-strength steel for machinery,
high-performance steel for oil & gas transmission pipelines, steel
for ocean engineering and steel for nuclear power to meet the
demand of major projects and major equipment.
c) Special steel companies are encouraged to develop green
low-carbon, energy-saving and environmentally friendly steel as
well as high-performance special steel needed by the equipment
manufacturing industry, emerging industries and the aerospace
industry.
12
th
5YP for mineral resources
By 2015, the large and medium key mines will enhance efficiency and
the mining recovery rate and ore dressing recovery rate of small mines
shall be raised by 3-5ppts from the current level. Compared with 2010,
the resources recovery rate shall be improved by 5%.
To summarise the 12
th
5YP for the steel sector, industry reform is likely to be
a top priority, which would result in a higher industrial concentration ratio.
We also expect to witness tightening control over upstream resources in the
steel industry, the development of the special steel sector and the key
industry of new materials, which currently has a heavy reliance on imports.
We reckon 2012 will be the prime time for reforms in the steel industry.

Figure 51. Projected Capacity of 10 Largest Steel Groups
(mt) 2010 2015E CAGR
1 Hebei I&S Group 53 Hebei I&S Group 106 15%
2 Baosteel Group 44 Baosteel Group 93 16%
3 Angang Group 40 Angang Group 87 17%
4 Wuhan I&S 37 Shandong I&S 59 10%
5 Shagang Group 30 Wuhan I&S 57 9%
6 Shougang Group 26 Shougang Group 57 13%
7 Shandong I&S 23 Shagang Group 35 3%
8 Hebei Xinwuangang 19 Valin I&S Group 32 NA
9 Boahi Steel Group 17 Maanshan I&S Group 25 11%
10 Maanshan I&S Group 15 Taiyuan I&S Group 25 NA
Top 10 (mt) 305 Top 10 (mt) 576.1
China 627 China 960
Market share 49% Target market share 60%

Figure 52. Top 10 Concentration Ratio of Crude Steel Output in China
36%
35%
37%
49%
49%
44%
44%
60%
30%
35%
40%
45%
50%
55%
60%
65%
2005 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E
Source: www.chinaisa.org.cn, BOCI Research

Special steel industry to receive key government support
Although the Chinese special steel industry has made great strides in recent
years, it is still in a preliminary development stage compared with those of
developed countries. In industrialised countries, the output of special steel
usually accounts for 10-20% of the output of crude steel, while in China, it is
only about 5-10%. The output of middle and high-end special steel is even
more inadequate, and future industrialisation will fuel the demand for
high-quality special steel. With the advancement of industrialisation in China
and the increase in government support, the special steel industry will see
further development in the 12
th
5YP period. It is also worth noting that the
special steel sector has shone compared with other carbon steels. Specifically,
Xining Special Steel, Zhejiang Jiuli Hi-tech Metals, Jiangxi Changli Automobile
Spring, Xinxing Ductile Iron Pipes, Daye Special Steel and other special steel
companies led the pack in 9M11 in terms of year-on-year earnings growth,
while large ordinary steel companies such as Angang and Maanshan I&S
showed significant year-on-year decreases. We believe this was due to the
better downstream demand for special steel in some categories (i.e. the
transport of petroleum and petrochemicals as well as the mining and power
equipment sectors) given the weak downstream demand for other steel
products in 2011. We continue to like the special steel sector.

With the advancement of
industrialisation in China and the
increase in government support, the
special steel industry will see further
development in the 12
th
5YP period

Figure 53. Special Steel Price Trend
3,000
4,000
5,000
6,000
7,000
8,000
0
1
/
0
7
0
5
/
0
7
0
9
/
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/
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/
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1
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9
/
1
1
0
1
/
1
2
Bearing steel (GCr15 50mm hot rolled) Spring steel (60Si2Mn 50mm)
Pinion steel (20CrMnTi) Structural alloy steel
(RMB/tonne)

Figure 54. Robust YoY Earnings Growth for Special Steel Companies
(9M11)
0%
20%
40%
60%
80%
100%
120%
140%
160%
Xining
Special
Steel
Jiuli Hi-tech
Metals
Changli
Auto
Spring
Taigang
Stainless
Steel
Xinxing
Ductile Iron
Pipes
Fushun
Special
Steel
Daye
Special
Steel

Figure 55. Steel Output of 32 Major Special Steel Companies
Category Segment 2010 2009 Growth
(tonnes) (tonnes) (%)
Crude steel total 88,683,616 7,9701,902 11
Non-alloy steel 34,785,692 3,1728,024 10
Plain-quality non-alloy steel 7,923,061 9,174,109 (14)
High-quality non-alloy steel 20,296,245 17,499,365 16
Special-quality non-alloy steel 6,566,386 5,054,550 30
Low-alloy steel 29,117,845 27,768,547 5
Plain-quality low-alloy steel 18,300,572 18,083,693 1
High-quality low-alloy steel 9,964,380 9,294,728 7
Special-quality low-alloy steel 852,893 390,126 119
Alloy steel 20,619,971 16,543,012 25
High-quality alloy steel 3,472,884 3,057,760 14
Special-quality alloy steel 17,147,086 13,485,252 27
Stainless steel 4,160,109 3,662,319 14

BRIEF REVIEW OF THE STEEL INDUSTRY IN 2011
Daily Output has been Falling since July 2011
In 2011, Chinas production of crude steel increased 9.5% YoY to 682m
tonnes, representing a new high. In view of the daily output of crude steel,
China registered 1.86m tonnes of average crude steel output per day in 2011,
2.01m tonnes per day in late July (the peak for the year) and 1.626m tonnes
in late December (the trough).

Figure 56. Daily Output of Crude Steel
150
160
170
180
190
200
210
3
0
/
1
1
/
0
9
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2
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1
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3
0
/
1
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/
1
1
(10,000 tonnes)


Figure 57. Crude Steel Output
0
100
200
300
400
500
600
700
800
1
9
9
0
1
9
9
1
1
9
9
2
1
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9
3
1
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9
4
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9
9
5
1
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6
1
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9
2
0
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2
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2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
E
0
5
10
15
20
25
30
(10,000 tonnes)
Crude steel output (LHS) Growth (RHS)
(%)

Figure 58. Rebar Output Figure 59. HRC Output
0
300
600
900
1,200
1,500
0
1
/
0
5
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/
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/
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/
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1
(mt)
(20)
(10)
0
10
20
30
40
50
60
(%)

0
300
600
900
1,200
1,500
0
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/
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/
1
1
0
9
/
1
1
(mt)
(40)
(20)
0
20
40
60
80
100
(%)



Figure 60. Breakdown of Crude Steel Consumption (2010)
Machinery
17%
Energy
8%
Transportation
facilities
6%
Infrastructure
20%
Others
9%
Property
26%
Automotive
7%
Household
durables
4%
Shipbuilding
3%


Figure 61. Breakdown of Steel Demand by Machinery Product
Special
equipment
17%
Heavy
machinery
17%
Agricultural
machinery
19%
Machine tools
19%
Engineering
machinery
16%
Machinery for
power industry
7%
General
machinery for
petrochemicals
5%


Figure 62. YoY Growth Rates in Downstream Industries by Month (2011)
YoY change (%) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov
Urban FAI - 24.9 25.0 25.4 25.8 25.6 25.4 25.0 24.9 24.9 24.5
Investment in real estate development - - 33.2 34.6 35.4 28.9 36.5 31.6 25.0 25.0
Area of sold commercial housing - - 15.8 (9.9) 18.5 25.4 17.8 13.5 9.5 (9.9) (1.7)
Area of built commercial housing - - 10.5 11.8 22.4 20.9 16.6 23.3 12.1 (2.7) 14.1
New construction area - - 19.5 26.9 22.2 22.8 34.0 32.5 8.9 1.9 9.1
Industrial added value - 14.9 14.8 13.4 13.3 15.1 14.0 13.5 13.8 13.2 12.4
Total output value of machinery industry 22.4 22.3 21.5 17.7 15.8 19.5 16.3 19.1 17.7 16.2 16.7
Automobile output 13.3 6.3 9.9 (1.5) (1.9) 3.7 (1.4) 9.7 2.5 1.3 (1.2)
Power generating equipment 47.5 84.9 44.7 8.1 (8.2) 17.7 5.5 19.4 21.9 (11.8) 15.0
Washing machines 9.1 3.3 12.2 31.8 27.2 31.9 14.8 11.7 12.7 10.4 (9.3)
Refrigerators 25.3 4.2 21.0 10.9 16.0 22.1 21.1 13.5 16.9 26.9 27.5
Air conditioners 57.8 51.2 48.4 32.5 29.4 37.6 28.7 36.5 4.5 (3.8) (1.0)

Figure 63. YoY Growth Rates in Downstream Industries by Month (2010)
YoY change (%) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Urban FAI - 26.6 26.4 26.1 25.9 25.5 24.9 24.8 24.5 24.4 24.9 24.5
Investment in property development - - 39.0 38.5 38.6 34.3 28.1 31.0 32.1 34.5 63.5 12.3
Area of sold commercial housing - - 32.8 27.5 (3.4) (3.2) (15.4) (10.1) 16.6 16.0 14.5 17.8
Area of built commercial housing - - (11.3) 0.8 16.6 10.3 43.3 23.0 10.9 33.7 36.9 2.2
New construction area - - 87.1 72.8 100.6 55.6 65.7 55.2 44.3 51.6 (17.4) 4.7
Industrial added value - 12.8 18.1 17.8 16.5 13.7 13.4 13.9 13.3 13.1 13.3 13.5
Total output value of machinery industry 66.2 30.0 36.9 36.2 33.7 29.6 30.7 28.8 28.9 29.7 30.4 32.0
Automobile output 144.3 47.0 51.7 34.9 26.7 18.6 17.3 13.0 17.9 22.6 27.6 23.6
Power generating equipment 24.7 (13.0) 8.1 39.5 17.1 (8.9) 5.9 2.5 (2.0) 6.2 11.9 6.9
Washing machines 73.7 22.7 28.7 34.3 30.8 24.0 45.3 26.4 12.6 15.2 23.7 12.4
Refrigerators 80.9 21.1 8.6 29.7 30.6 23.5 20.0 22.4 29.7 30.8 28.9 11.1
Air conditioners 94.3 (9.5) 24.4 27.5 69.8 47.3 45.6 34.7 42.0 42.2 33.6 48.4

Most YoY Growth Recorded in 1H11 before Fading in 2H11
Long steel outperformed flat steel in 2011 with an average year-on-year
increase of 12-13%, vs. flat steels mixed performance. Within this, CRC was
the worst performer with a 2% decline. Having said that, all steel products
showed half-on-half declines.

Figure 64. ASP Growth by Product (2011)
Long steel Flat steel
Rebar Wire rod HRC CRC Thick plate
YoY growth (%) 13 12 10 (2) 8
HoH growth (%) (4) (2) (5) (4) (7)

Figure 65. Price Change Trends in 5 Categories (2005-11)
2,000
3,000
4,000
5,000
6,000
7,000
8,000
0
1
/
0
5
0
4
/
0
5
0
7
/
0
5
1
0
/
0
5
0
1
/
0
6
0
4
/
0
6
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7
/
0
6
1
0
/
0
6
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/
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7
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/
0
7
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7
/
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7
1
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/
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7
0
1
/
0
8
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4
/
0
8
0
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/
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8
1
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/
0
8
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/
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9
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4
/
0
9
0
7
/
0
9
1
0
/
0
9
0
1
/
1
0
0
4
/
1
0
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/
1
0
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/
1
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/
1
1
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4
/
1
1
0
7
/
1
1
1
0
/
1
1
25mm Rebar 6.5mm wire rods
3mm HRC 1mm CRC
20mm medium and thick plate
(RMB/t)


Figure 66. Price Change Trends in 5 Categories (2011)
4,000
4,500
5,000
5,500
6,000
1
3
/
0
4
/
1
1
2
7
/
0
4
/
1
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/
0
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/
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/
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/
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/
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/
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/
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/
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/
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1
3
1
/
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/
1
1
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/
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/
1
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2
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/
0
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/
1
1
1
2
/
1
0
/
1
1
2
6
/
1
0
/
1
1
0
9
/
1
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/
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2
3
/
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/
1
1
0
7
/
1
2
/
1
1
2
1
/
1
2
/
1
1
25mm rebar 6.5mm high-speed wire
3mm HRP 1mm CRP
20mm med-thick plate
(RMB/t)

Figure 67. Pricing Policy of Baosteel in 2011 (tax exclusive, RMB/tonne)
C
a
t
e
g
o
r
y

M
a
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r
i
a
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.

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(
%
)

P
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i
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F
e
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C
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e

(
%
)

P
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i
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a
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(
%
)

P
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(
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)

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(
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)

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)

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(
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)

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(
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(
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(
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HRC SPHC 3.0*1250*C 5,002 6 5,102 2 5,402 6 5,402 0 5,202 (4) 5,202 0 5,002 (4) 5,002 0 5,002 0 5,062 1 5,062 0 4,862 (4)
CRC SPCC 1.0*1250*C 5,236 4 5,336 2 5,596 5 5,596 0 5,296 (5) 5,296 0 5,196 (2) 5,246 1 5,366 2 5,416 1 5,416 0 5,116 (6)
Pickled
HRC
SPHC 3.0*1250*C 5,457 4 5,557 2 5,757 4 5,857 2 5,657 (3) 5,257 (2) 5,157 (2) 5,157 0 5,277 2 5,327 1 5,327 0 5,027 (6)
Heavy
plate
Ship
plate A
16.0-20.0
*2000
4,800 3 4,900 2 5,200 6 5,200 0 5,050 (3) 5,050 0 5,050 0 4,950 (2) 4,950 0 4,950 0 4,950 0 4,650 (6)
Hot
dipped
galv.
DC51D+
Z
1.0*1250*C 5,287 4 5,387 2 5,647 5 5,647 0 5,347 (5) 5,347 0 5,347 0 5,397 1 5,547 3 5,597 1 5,597 0 5,197 (7)

Significant YoY Rises in Iron Ore Prices
Figure 68. Import Price of Iron Ore at Qingdao Port
(CFR)
Figure 69. Tax-inclusive Iron Ore Refined at Tangshan
Port (66%)
500
700
900
1,100
1,300
1,500
1
0
/
0
8
1
2
/
0
8
0
2
/
0
9
0
4
/
0
9
0
6
/
0
9
0
8
/
0
9
1
0
/
0
9
1
2
/
0
9
0
2
/
1
0
0
4
/
1
0
0
6
/
1
0
0
8
/
1
0
1
0
/
1
0
1
2
/
1
0
0
2
/
1
1
0
4
/
1
1
0
6
/
1
1
0
8
/
1
1
1
0
/
1
1
(RMB/t)

500
700
900
1,100
1,300
1,500
1,700
1
1
/
0
8
0
1
/
0
9
0
3
/
0
9
0
5
/
0
9
0
7
/
0
9
0
9
/
0
9
1
1
/
0
9
0
1
/
1
0
0
3
/
1
0
0
5
/
1
0
0
7
/
1
0
0
9
/
1
0
1
1
/
1
0
0
1
/
1
1
0
3
/
1
1
0
5
/
1
1
0
7
/
1
1
0
9
/
1
1
1
1
/
1
1
(RMB/t)

Source: Bloomberg

Source: Bloomberg

Financials of Private Companies Healthier than those of
SOEs
The latest data of China Iron and Steel Association (CISA) indicates that the
77 large and medium steel companies cumulatively registered RMB85.297bn
in profit in 11M11, representing a year-on-year increase of 8.1%, and a
2.55% sales profit margin. In November alone, the 77 producers net profit
margin was down from 0.47% in October to 0.43%, and the percentage of
loss-making enterprises rose from 32.5% in October to 39%. Among these,
state-owned enterprises net margins were in general below 2.99%, while
those of private companies were higher than average.
We note that six A-share-listed steel companies reported net margins of
above 5% during 10M11, namely Hebei Jinxi I&S, Hebei Xinwuan I&S,
Handan Zongheng I&S, Inner Mongolia Baotou Steel Union, Baoshan I&S and
CITIC Pacific Limited, most of which are private companies.

Figure 70. Net Profit Margin and ROE Trends
0
2
4
6
8
10
12
14
16
18
20
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
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2
0
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7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
E
(%)
Sales profit margin ROE

Figure 71. Steel Companies Sales Profit Margin
(monthly)

Figure 72. Steel Companies ROE (monthly)
(20)
(15)
(10)
(5)
0
5
10
0
1
/
0
7
0
4
/
0
7
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/
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/
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/
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(%)

(40)
(30)
(20)
(10)
0
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Sluggish Global Economy Dragging Steel Exports
The latest customs data indicate that China exported 3.72m tonnes of steel in
December, a MoM decline of 11.5% and a YoY rise of 30.5%. It cumulatively
exported 48.91m tonnes of steel from January to December, a YoY increase
of 14.9%. China imported 1.19m tonnes of steel in December, a MoM decline
of 3.3% and a YoY decline of 15.6%. It cumulatively imported 15.58m tonnes
of steel from January to December, a YoY decline of 45.3%. Generally, owing
to the weak global economy, the steel export outlook appears grim. Taking
the exports to Europe for example, steel import demand from Europe has
fallen sharply and importers have begun to demand price reductions in view
of the debt crisis.

Figure 73. Steel Exports Figure 74. Steel Imports
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Steel Industry FAI remains Strong, especially among
non-SOEs
In 11M11, ferrous metal industry FAI grew by 18.6% YoY to RMB349.254bn.
This rapid growth suggests robust capacity expansion ahead. In terms of
regions, the investment hot spot is the Bohai Rim (encompassing Hebei,
Liaoning, Shandong, Tianjin and Beijing), which recorded RMB85.3bn in steel
project investment during 10M11, accounting for 27.2% of total investments.

In 10M11, the total FAI among non-SOE steel enterprises was double that of
SOEs. SOE steel mills FAI amounted to RMB115.26bn (down 0.38% YoY),
compared with RMB235.85bn for non-SOEs (up 39.4% YoY).

Figure 75. Steel Industry FAI Growth still Strong
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Sharp Increase in Financing Costs
Given the tightened monetary policy and significant increase in funding costs
in 2011, the financial costs of steel companies have risen considerably.
According to CISA, the financial costs of CISA member enterprises soared
37.18% YoY from January to November 2011 due to the significant increase
in the discount amounts and discount rate of steel companies bank
acceptances. Assuming a moderate adjustment to monetary policy in 2012
will bring about a reduction in the funding costs of steel industry, the liquidity
of the industry may be improved, the financial strain of downstream
manufacturers may be alleviated and demand may be stimulated to some
extent. .

Figure 76. Steep Rise in Financial Expense Ratios of Steel Companies
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Steel Stocks Underperformed in 2011
Impacted by the poor performance of the steel market, the A-share steel
sector underperformed in 2011, with the sector dropping 30.2% in the year
(CSI 300 down 26.5%). Only Inner Mongolia Baotou Steel Union managed a
gain. Domestic steel shares with only small declines mainly consisted of
companies that had completed asset reorganisations (such as Jinan I&S and
Laiwu Steel Corp), energy-related/special steel companies and private steel
companies like Zhejiang Jiuli Hi-tech Metals and Nanjing I&S.

Figure 77. Steel Stock Performances (2011)
-50%
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Figure 78. Performance of A-share Ferrous Metal Sector vs. CSI 300 (2011)
1,800
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COMPANY ANALYSIS
Figure 79. Sales Exposure
(%) Long steel Flat steel
Baosteel 10 90
Angang 9 91
Maanshan 50 50
Source: Company data, BOCI Research
*Among Maanshans 50% flat steel, 3% belongs to train wheel rims

Figure 80. Capacity Expansion
(mt) 2007 2008 2009 2010 2011E 2012E 2013E
Baosteel 24.0 24.0 24.0 26.0 26.0 22.0 25.5
YoY growth (%) 0 0 8 0 -15 14
Angang 16.1 16.0 20.1 21.7 21.7 21.7 21.7
YoY growth (%) 6 0 25 8 0 0 0
Maanshan 14.5 17.9 16.7 16.7 16.7 16.7 18.7
YoY growth (%) 57 24 (7) 0 0 0 12

Figure 81. Major Applications for Steel Products
Flat steel products Long steel products
HRC CRC Galvinised sheet Medium-thick plate Section steel Wire rods/ rebars Pipe steel
Construction 1 1 2 1 (bridges) 2 1
Automotive 1 1 1
Railways 1
Shipping 2 1
Containers 1
Machinery 2
Household durables 2 1 1 1
Energy pipelines 2 1
Notes: 1 = preferred application; 2 = possible application

Figure 82. Breakdown of Steel Products Angang vs. Maanshan I&S
HRC CRC Galvanised Medium thick plate Section steel Wire rod Pipe steel Others
Baosteel 25% 41% 2% 8% 3% 2% 6% 13%
Angang 41% 20% 7% 15% 4% 4% 3% 6%
Maanshan 49% 18% 32% 1%

Figure 83. Production Costs
Angang Maanshan I&S
Iron ore 43% 43%
Coking coal 24% 25%
Scrap steel 11% 11%
Others 22% 21%

Figure 84. ROE Comparisons
% 2007 2008 2009 2010 2011E 2012E 2013E
Baosteel 14.8 6.9 6.0 12.0 6.7 7.3 7.6
Angang 24.7 5.7 1.3 3.5 (4.5) 0.7 2.0
Maanshan 10.5 2.9 1.5 4.1 1.2 1.2 2.2

Figure 85. Historical P/B ratio
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Angangs P/B premium is only 1.04x,
20% below the historical average
Rating Change 1 February 2012

347 HK 000898 CH
Stock Rating
HOLD BUY
Prior HOLD HOLD
Price HK$5.58 RMB4.58
Target Price HK$5.21 RMB5.80
Prior TP HK$5.30 RMB5.05
Up/Downside -7% 27%
-6.63 EFA_A_Upside
TP Basis 0.7x 2012 P/B 1x 2012 P/B
Sector Rating NEUTRAL NEUTRAL
Our H-share earnings for 2011-13E are 68-761%
below consensus, lowest on the street.
Our A-share earnings for 2011-13E vary from
consensus by 58-354%.

Lower 2011-13E earnings by 72-352%.
Limited room for margin squeeze.

Recent loosening of monetary policies
supporting domestic consumption.
Potential steel production cut in China.
Annual results on 28 March 2012.

Trading Summary (H shares)

H - Angang Steel (347 HK)
3
5
7
9
11
13
54
59
64
69
74
79
84
89
94
99
104
Price Close Relative to HSCEI (RHS)
Source: Bloomberg.
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YTD 1M 3M 12M
Absolute (%) 15.9 20.4 49.7 -47
Relative to HSCEI (%) -5.7 -9.4 32.4 -31.5

Shares outstanding (m) 7,235
Free float
0.312
31.2%
Market cap. (HK$ m) 42,890
Daily turnover (3M avg.) (m) 13.70
Net debt / Equity 67%
Major shareholders
Angang Group 67.3%

Metals and Mining: Iron & Steel
Michelle Leung
(852) 3988 6431
Angang Steel
Gradual recovery
Although oversupply should persist in Chinas steel industry, we see
short-term trading opportunities as steel prices could spike
post-Chinese New Year (CNY). The limited room for further margin
squeeze at this level and the more than 10% HoH decline in imported
iron ore prices during 2H11 should be reflected in 1H12 earnings. We
reaffirm HOLD on Angang Steels H shares but upgrade its A shares
from HOLD to BUY on valuation.
Cut 2011-13E Earnings by 72-352%
Angang has just announced a net loss of RMB2.15bn in 2011, implying a
RMB2.4bn loss in 4Q11 due to high raw material costs and capacity suspension.
We calculate that the average iron ore purchase cost should have risen by 25%
HoH to around RMB1,150/tonne in 2H11. While management thinks a gross
margin of 5-10% is required to break even, we expect the company to only
achieve one of 3% in 2011.
We fail to see any organic capacity expansion plan for Angang over the next two
years, and the chances of closing M&A deals with Benxi Steel and Panzhihua
Iron and Steel appear slim in 2012. Having said that, a blast furnace accounting
for 15% of total capacity will resume operations this year, likely boosting sales
volume to 21.3m tonnes-21.7m tonnes during 2011-13E.
Limited Room for Margin Squeeze
While we believe Angang has been struggling to break even on its major
products, we see the possibility of a steel price rally in the near term post-CNY.
The softening of downstream demand has resulted in a steel price drop of more
than 10% in August-December, which has lowered mill profits and should result
in industry production cuts. Indeed, daily crude steel production declined by
20% from the peak of the last 10 days in June (2.01m tonnes) to the trough
(1.63m tonnes) in the last 10 days in December.
Maintain HOLD on H shares; Upgrade A shares to BUY
Despite our earnings cuts reflecting the more conservative estimates, we are
turning less cautious on the companys earnings outlook given the unlikelihood
of further margin squeeze. Moreover, the recent repurchase programme from
executives with a 2-year lock-up period has been seen as the floor price level.
Government policies to boost domestic demand should benefit flat steel
producers like Angang. We maintain HOLD on its H shares but cut our target
price from HK$5.30 to HK$5.21, based on 0.7x 2012 P/B (previously 0.6x),
which is still lower than the mid-cycle valuation of 1.03x P/B. On the other hand,
we upgrade the A shares from HOLD to BUY and lift our target price to
RMB5.80, based on 1.0x 2012 P/B, which is equivalent to -1SD P/B valuation.
(H-Share)
Investment Summary
12-09 12-10 12-11E 12-12E 12-13E
Total turnover (RMB m) 69,874 91,927 101,905 99,129 95,198
Revenue growth (10.5%) 31.6% 10.9% (2.7%) (4.0%)
Net profit (RMB m) 748 2,054 (2,342) 306 853
Fully diluted EPS (RMB) 0.103 0.284 (0.324) 0.042 0.118
FD P/E (x) 43.9 16.0 NA 107.3 38.5
FDEPS growth (76%) 175% (214%) na 179%
Previous EPS (RMB) 0.103 0.284 0.115 0.223 0.561
Consensus EPS (RMB) 0.049 0.162 0.371
EPS vs Consensus (761%) (74%) (68%)
Recurrent CPS (RMB) 0.63 1.25 0.82 0.23 0.26
P/CF (x) 7.22 3.64 5.56 19.43 17.18
EV/EBITDA (x) 7.93 5.74 11.08 7.86 7.35
Dividend/share (RMB) 0.060 0.128 0.000 0.000 0.053
Dividend yield 1.32% 2.81% 0.00% 0.00% 1.17%
ROE 1.32% 3.54% (4.48%) 0.65% 2.02%

Source: Company data, Bloomberg data, BOCI Research estimates. Closing prices are as of 31 January 2012.

(A shares)
Investment Summary
12-09 12-10 12-11E 12-12E 12-13E
Revenue growth (11.2%) 31.8% 10.6% (2.7%) (4.0%)
Net profit (RMB m) 727 2,059 (2,111) 469 1,084
Fully diluted EPS (RMB) 0.100 0.285 (0.292) 0.065 0.150
FD P/E (x) 47.67 16.83 NA 73.83 31.97
FDEPS growth (76%) 183% (203%) na 131%
Previous EPS (RMB) 0.100 0.285 0.106 0.220 0.575
EPS vs Consensus (354%) (70%) (58%)
P/CF (x) 7.75 3.88 5.64 20.12 18.18
EV/EBITDA (x) 9.16 6.60 10.83 8.03 7.53
Dividend yield 1.25% 0.00% 0.00% 0.00% 0.00%
ROE 1.36% 3.77% (4.08%) 1.04% 2.70%


Figure 1. QoQ Price Changes for Angangs Major Steel Products
HRC CRC Heavy plate Galvanised
1Q11 4,210 4,910 4,350 5,550
2Q11 4,157 4,830 4,400 5,400
3Q11 4,100 4,610 4,297 5,250
4Q11 3,833 4,587 4,087 5,017

QoQ change (%)
1Q11 8.1 7.0 12.5 5.4
2Q11 (1.3) (1.6) 1.1 (2.7)
3Q11 (1.4) (4.6) (2.3) (2.8)
4Q11 (6.5) (0.5) (4.9) (4.4)

Figure 2. Scenario Analysis of Angangs Profitability
Iron ore price
(US$/t)CIF Coking coal
HRC production
cost
Angang's HRC
market price Gross margin
(RMB/t) (RMB/t) (RMB/t) (%)
116 1,000 3,375 3,650 8
120 1,000 3,425 3,650 7
130 1,000 3,523 3,650 4
136 1,000 3,585 3,650 2
140 1,000 3,626 3,650 1
150 1,000 3,817 3,650 (4)
160 1,000 3,978 3,650 (8)

Trading Summary (A shares)
A - Angang Steel (000898 CH)
3.9
4.9
5.9
6.9
7.9
8.9
9.9
69
76
82
89
96
102
109
Price Close Relative to xin9i (RHS)
Source: Bloomberg.
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YTD 1M 3M 12M
Absolute (%) 5.3 5.3 -11 -37.5
Relative to HSCEI (%) -1 -1 -6.2 -24.7

Free float
0.312
31.2
Market cap. (RMB m) 34,979
Net debt / Equity 68.8%
Major shareholder
Angang Group 67.3%

Figure 3. Angang Steel (H) P/B Chart
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Figure 4. Angang Steel (A) P/B Chart
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Financial Summary (H shares)
Income Statement (RMB m)
12-09 12-10 12-11E 12-12E 12-13E
Total turnover 69,874 91,927 101,905 99,129 95,198
Cost of sales (65,721) (85,409) (99,193) (93,071) (88,383)
Total operating costs (2,517) (3,200) (3,952) (3,541) (3,381)
Operating EBITDA 7,904 10,502 5,846 8,714 9,622
Deprec. and amort. (6,268) (7,184) (7,087) (6,196) (6,187)
Operating EBIT 1,636 3,318 (1,241) 2,518 3,435
Net interest income (940) (1,333) (2,091) (2,233) (2,431)
Exchange gains - - - - -
Other recurring income - - 55 - -
Associates' profit 176 393 - - -
Exceptional income - - - - -
Pre-tax profit 872 2,378 (3,277) 285 1,004
Taxation (165) (413) 783 (68) (240)
Minority interests 41 89 152 89 89
Preferred dividends - - - - -
Net profit 748 2,054 (2,342) 306 853
Recurring net profit 748 2,054 (2,342) 306 853

Per Share Values (RMB)
12-09 12-10 12-11E 12-12E 12-13E
Earnings per share 0.10 0.28 (0.32) 0.04 0.12
Dividend/share 0.06 0.13 - - 0.05
Book value per share 8.4 7.6 6.8 6.1 5.6
Tangible BVPS 8.4 7.6 6.8 6.1 5.6
Net cash/(debt) per share (4.2) (3.9) (4.6) (5.1) (5.4)

Balance Sheet (RMB m)
12-09 12-10 12-11E 12-12E 12-13E
Total cash and equivalents 2,242 3,651 2,506 1,572 1,000
Accounts receivable 4,145 4,872 1,906 1,854 1,781
Inventories 10,658 13,134 16,149 15,192 14,316
Other current assets 9,592 11,369 11,975 11,856 11,686
Total current assets 26,637 33,026 32,536 30,473 28,782
Net fixed assets 73,776 70,550 70,290 69,095 67,912
Total investments 8,665 2,167 2,167 2,167 2,167
Intangible assets 13 8 9 7 6
Other assets 1,038 1,368 1,368 1,368 1,368
Total long-term assets 83,492 74,093 73,834 72,638 71,453
Total assets 110,129 107,119 106,370 103,111 100,235
Trade creditor 6,744 9,371 8,958 8,428 7,942
Short-term debt 21,363 19,356 17,501 19,255 19,881
Other current liabilities 9,721 9,755 12,150 11,805 11,450
Total current liabilities 37,828 38,482 38,609 39,488 39,273
Total long-term debt 11,502 12,717 18,071 19,297 20,425
Other liabilities - - - - -
Shareholders' equity 60,725 55,329 49,287 44,211 40,451
Minority interests - - - - -
Total liabilities & equity 110,129 107,119 106,370 103,111 100,235

Growth
12-09 12-10 12-11E 12-12E 12-13E
Revenue growth (10.5%) 31.6% 10.9% (2.7%) (4.0%)
Operating EBITDA growth (15.2%) 32.9% (44.3%) 49.1% 10.4%
Operating EBIT growth (64.0%) 102.8% (137.4%) 36.4%
Pretax profit growth (77.3%) 172.7% (237.8%) 252.1%
Net profit growth (75.0%) 174.5% (214.0%) 178.8%

Source: Company data, Bloomberg data, BOCI Research estimates

Cash-flow Statement (RMB m)
12-09 12-10 12-11E 12-12E 12-13E
Pre-tax profit 872 2,378 (3,277) 285 1,004
Depreciation 6,264 7,166 7,084 6,194 6,185
Goodwill & other amort. 4 18 3 2 2
Net interest 940 1,333 2,091 2,233 2,431
Change in working capital (547) 2,581 5,488 (261) (180)
Tax paid (165) (413) 783 (68) (240)
Other operating cash flow (2,643) (3,644) (6,269) (6,695) (7,290)
Operating cash flow 4,549 9,026 5,903 1,690 1,912
Capex (7,013) (4,935) (6,000) (4,000) (4,000)
Cash flow from disposals - - - - -
Acquisition of subsidiaries 1,800 185 - - -
Others - - - - -
Cash flow from investing (5,213) (4,750) (6,000) (4,000) (4,000)
Shares repurchased - - - - -
Debt issued 3,056 (812) (124) 1,376 1,516
Proceeds from issue of shares - - - - -
Interest received - - - - -
Dividends paid (3,086) (1,985) (924) - -
Interest paid (940) (1,333) (2,091) (2,233) (2,431)
Other cash flow from funding 902 1,263 2,091 2,233 2,431
Cash flow from financing (68) (2,867) (1,048) 1,376 1,516
Total cash generated (732) 1,409 (1,145) (934) (572)
Free cash flow to firm (664) 4,276 (97) (2,310) (2,088)
Free cash flow to equity 1,452 2,131 (2,312) (3,167) (3,003)

Key Ratios
12-09 12-10 12-11E 12-12E 12-13E
Profitability
EBITDA margin 11.3% 11.4% 5.7% 8.8% 10.1%
EBIT margin 2.3% 3.6% (1.2%) 2.5% 3.6%
Pre-tax margin 1.2% 2.6% (3.2%) 0.3% 1.1%
Net profit margin 1.1% 2.2% (2.3%) 0.3% 0.9%
Liquidity
Current ratio 0.7 0.9 0.8 0.8 0.7
Interest coverage ratio 1.7 2.5 (0.6) 1.1 1.4
Net debt to equity 50% 51% 67% 84% 97%
Quick ratio 0.4 0.5 0.4 0.4 0.4
Valuation
P/E (x) 43.9 16.0 NA 107.3 38.5
Core P/E (x) 43.9 16.0 NA 107.3 38.5
P/B (x) 0.5 0.6 0.7 0.7 0.8
P/CF (x) 7.2 3.6 5.6 19.4 17.2
EV/EBITDA (x) 7.9 5.7 11.1 7.9 7.4
Activity ratios
Inventory days 59.2 56.1 59.4 59.7 59.1
Accounts receivables days 21.7 19.3 6.8 6.8 6.8
Accounts payables days 37.5 40.0 33.0 33.1 32.8
Returns
Dividend payout ratio 58.0% 45.0% 0.0% 0.0% 45.0%
ROE 1.3% 3.5% (4.5%) 0.7% 2.0%
ROAA 0.7% 1.9% (2.2%) 0.3% 0.8%
ROACE 1.9% 3.7% (1.4%) 3.0% 4.2%


Financial Summary (A shares)
12-09 12-10 12-11E 12-12E 12-13E
Total turnover 70,126 92,431 102,211 99,427 95,484
Cost of sales (63,712) (82,694) (98,806) (92,841) (91,768)
Total operating costs (5,670) (7,998) (4,353) (4,036) (286)
Deprec. and amort. (6,268) (7,184) (7,087) (6,196) (6,187)
Operating EBIT 744 1,739 (947) 2,551 3,430
Net interest income (902) (1,249) (1,986) (2,143) (2,309)
Other recurring income 815 1,477 - - -
Associates' profit 186 411 - 100 206
Pre-tax profit 843 2,378 (2,934) 507 1,327
Taxation (157) (408) 733 (127) (332)
Net profit 727 2,059 (2,111) 469 1,084
Recurring net profit 727 2,059 (2,111) 469 1,084

12-09 12-10 12-11E 12-12E 12-13E
Earnings per share 0.10 0.28 (0.29) 0.06 0.15
Dividend/share 0.06 - - - -
Tangible BVPS 6.5 6.7 5.7 4.9 4.3
Net cash/(debt) per share (4.2) (3.5) (4.6) (5.1) (5.4)

12-09 12-10 12-11E 12-12E 12-13E
Accounts receivable 1,770 2,061 705 686 659
Inventories 10,658 13,134 16,149 15,192 14,316
Net fixed assets 64,393 62,544 63,323 62,128 60,945
Intangible assets 7,061 6,967 6,967 6,967 6,967
Other assets 3,607 2,673 2,594 2,594 2,594
Total assets 100,926 105,114 107,099 103,842 100,967
Trade creditor 6,827 9,562 11,225 10,809 10,410
Short-term debt 21,363 16,435 17,501 19,255 19,881
Other liabilities 139 652 - - -
Minority interests - - - - -

Growth
12-09 12-10 12-11E 12-12E 12-13E
Revenue growth (11.2%) 31.8% 10.6% (2.7%) (4.0%)
Operating EBIT growth (82.8%) 133.7% (154.5%) 34.5%
Pretax profit growth (78.0%) 182.1% (223.4%) 161.6%
Net profit growth (75.6%) 183.2% (202.5%) 131.0%


12-09 12-10 12-11E 12-12E 12-13E
Pre-tax profit 843 2,378 (2,934) 507 1,327
Depreciation 6,264 7,166 7,084 6,194 6,185
Goodwill & other amort. 4 18 3 2 2
Net interest 902 1,249 1,986 2,143 2,309
Change in working capital (547) 2,581 5,488 (261) (180)
Tax paid (165) (413) 783 (68) (240)
Other operating cash flow (2,643) (3,644) (6,269) (6,695) (7,290)
Capex (7,013) (4,935) (6,000) (4,000) (4,000)
Cash flow from disposals - - - - -
Acquisition of subsidiaries 1,800 185 - - -
Others - - - - -
Debt issued 3,056 (812) (124) 1,376 1,516
Dividends paid (3,086) (1,985) (924) - -
Interest paid (940) (1,333) (2,091) (2,233) (2,431)
Other cash flow from funding 979 1,365 1,852 2,200 2,437
Cash flow from financing 9 (2,765) (1,286) 1,343 1,522
Total cash generated (732) 1,409 (1,145) (934) (572)
Free cash flow to firm (741) 4,174 141 (2,277) (2,094)
Free cash flow to equity 1,375 2,029 (2,073) (3,134) (3,009)

Key Ratios
12-09 12-10 12-11E 12-12E 12-13E
Profitability
EBITDA margin 10.0% 9.7% 6.0% 8.8% 10.1%
EBIT margin 1.1% 1.9% (0.9%) 2.6% 3.6%
Pre-tax margin 1.2% 2.6% (2.9%) 0.5% 1.4%
Net profit margin 1.0% 2.2% (2.1%) 0.5% 1.1%
Liquidity
Current ratio 0.7 0.9 0.8 0.7 0.7
Interest coverage ratio 0.8 1.4 (0.5) 1.2 1.5
Net debt to equity 57% 46% 69% 88% 103%
Quick ratio 0.4 0.5 0.4 0.4 0.3
Valuation
P/E (x) 47.7 16.8 NA 73.8 32.0
Core P/E (x) 47.7 16.8 NA 73.8 32.0
P/B (x) 0.6 0.6 0.7 0.8 0.9
P/CF (x) 7.7 3.9 5.6 20.1 18.2
EV/EBITDA (x) 9.2 6.6 10.8 8.0 7.5
Activity ratios
Inventory days 61.1 58.0 59.7 59.9 56.9
Returns
ROE 1.4% 3.8% (4.1%) 1.0% 2.7%
ROAA 0.8% 2.0% (2.0%) 0.4% 1.1%
ROACE 0.9% 2.0% (1.1%) 3.1% 4.3%



Target Price Change 1 February 2012

323 HK 600808 CH
Stock Rating
SELL HOLD
Price HK$2.68 RMB2.56
Target Price HK$2.00 RMB2.60
Prior TP HK$1.46 RMB2.70
Up/Downside -25% 2%
-25.37 EFA_A_Upside
TP Basis 0.45x FY12 P/B 0.7x 2012 P/B
Sector Rating NEUTRAL NEUTRAL
Our H-share earnings for 2011-13E are 22-60%
below consensus
Our A-share earnings for 2011-13E are 28-51%
below consensus.

A short-term rally in steel prices is expected
but in the mid-term, concerns remain over
construction slowdown, especially in the
property market.

Resumption of construction work post-CNY.
Recent loosening of monetary policies.
Annual results on 29 March 2012.

Trading Summary (H shares)
H - Maanshan Iron & Steel (323 HK)
1.1
1.6
2.1
2.6
3.1
3.6
4.1
4.6
5.1
63
69
76
82
88
94
101
107
113
Price Close Relative to HSCEI (RHS)
Source: Bloomberg.
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YTD 1M 3M 12M
Absolute (%) 7.6 7.6 13.6 -38.4
Relative to HSCEI (%) -6.1 -6.1 6.1 -28.3

Free float 25.6%
Market cap. (HK$ m) 23,426
Major shareholder
Magang (Group) Holding Co. Ltd 50.5%

Michelle Leung
(852) 3988 6431
Maanshan I&S
Overhangs from property remain
Despite the persistent oversupply in Chinas steel industry, we see
short-term trading opportunities with the potential jump in steel prices
following the Chinese New Year (CNY). Having said that, we only see a
short-term rally, but earnings could deteriorate rapidly in 2H12 as we
anticipate a sharp fall in housing starts. We reiterate our SELL rating
on the H shares of Maanshan I&S and HOLD on its A shares.
Cut 2011-13E Earnings by 4-54%
The company issued profit alert citing that its 2011 earnings would decline by
more than 50%YoY due to weak ASP and high raw material costs.
We reduce our 2011-13E earnings by 4-54% as we believe the company was only
able to achieve flat QoQ growth in 4Q11. In 2012, we expect iron ore prices to
decline, which should bode well for earnings. However, we believe the market has
been too optimistic on the contribution from high-speed train wheels, a product
that is still awaiting regulatory approval and for which no launch date has been
set.
Remain Negative on Long Steel
Our pessimistic view is built on 1) looming risks on property sector as our property
team failed to see any loosening in near term. 2) More new capacity to be added
in 2012 are long steel capacity and small mills. 3) Long steel inventory has been
rising much faster than flat steel.
No Capacity Expansion until 2013
Maanshan I&Ss crude steel capacity should stay at 16.7m tonnes per annum (tpa)
during 2011-12 and increase by 2m tpa in 2013, all HRC capacity. As such, the
companys HRC capacity should increase from 7m tpa in 2011 to 9m tpa by 2013.
Valuation
We believe the likely short-term spikes in steel prices and recent loosening of
monetary policies will be the reasons behind the share price rally. However, the
looming risks from the property sector (the company has 50% exposure to long
steel) and overcapacity problem remain overhangs. We now peg our H/A share
target prices to -1SD P/B at 0.45x 2012 P/B and 0.7x 2012 P/B, respectively. We
reiterate our SELL rating on H shares and HOLD on A shares.
(H shares)
Investment Summary
12-09 12-10 12-11E 12-12E 12-13E
Revenue growth (28.0%) 25.1% 14.5% (2.9%) 11.7%
Net profit (RMB m) 392 1,102 342 339 611
Fully diluted EPS (RMB) 0.051 0.143 0.044 0.044 0.079
FD P/E (x) 42.77 15.23 49.09 49.47 27.46
FDEPS growth (45%) 181% (69%) (1%) 80%
Previous EPS (RMB) 0.051 0.143 0.046 0.096 0.158
EPS vs Consensus (22.1%) (70.2%) (67.3%)
P/CF (x) 2.52 4.31 2.77 3.79 1.98
EV/EBITDA (x) 4.63 4.32 4.80 4.00 1.98
Dividend yield 1.83% 2.29% 0.71% 0.71% 1.27%
ROE 1.50% 4.10% 1.25% 1.23% 2.18%


Trading Summary (A shares)
A - Maanshan Iron & Steel (600808 CH)
2.2
2.7
3.2
3.7
4.2
4.7
86
92
98
104
110
116
Price Close Relative to xin9i (RHS)
Source: Bloomberg.
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250
300
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YTD 1M 3M 12M
Absolute (%) 4.4 1.6 -10.4 -23.6
Relative to HSCEI (%) -0.4 -2.4 -9.4 -10.9

Free float 25.6%
Major shareholder
Magang (Group) Holding Co. Ltd 50.5%

(A shares)
Investment Summary
12-09 12-10 12-11E 12-12E 12-13E
Revenue growth (27.2%) 25.3% 11.0% (2.9%) 11.7%
Net profit (RMB m) 392 1,102 342 339 611
FD P/E (x) 50.23 17.89 57.64 58.09 32.25
FDEPS growth (45%) 181% (69%) (1%) 80%
Previous EPS (RMB) 0.051 0.143 0.046 0.096 0.158
EPS vs Consensus (28.4%) (64.5%) (55.7%)
P/CF (x) 2.96 6.38 3.43 4.73 2.40
EV/EBITDA (x) 5.31 3.92 5.50 4.66 2.44
Dividend yield 1.56% 1.95% 0.61% 0.60% 1.08%
ROE 1.50% 4.10% 1.24% 1.20% 2.10%


Figure 1. Maanshan I&S (H) P/B Chart
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Source: Bloomberg, BOCI research

Figure 2. Maanshan I&S (A) P/B Chart
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Financial Summary (H shares)
12-09 12-10 12-11E 12-12E 12-13E
Total turnover 50,412 63,041 72,157 70,039 78,236
Cost of sales (47,675) (59,676) (69,776) (67,381) (74,941)
Total operating costs (1,353) (945) (1,259) (1,222) (1,365)
Deprec. and amort. (4,821) (4,858) (3,921) (3,957) (5,570)
Operating EBIT 1,384 2,420 1,122 1,436 1,930
Net interest income (1,004) (914) (881) (1,090) (1,161)
Other recurring income - - -
Associates' profit 183 205 304 195 204
Pre-tax profit 563 1,711 545 540 974
Taxation (29) (520) (136) (135) (243)
Minority interests (141) (90) (66) (66) (119)
Net profit 392 1,102 342 339 611
Recurring net profit 392 1,102 342 339 611

12-09 12-10 12-11E 12-12E 12-13E
Earnings per share 0.05 0.14 0.04 0.04 0.08
Dividend/share 0.04 0.05 0.02 0.02 0.03
Tangible BVPS 3.4 3.5 3.5 3.6 3.7
Net cash/(debt) per share (1.6) (1.9) (1.0) (0.6) 0.2

12-09 12-10 12-11E 12-12E 12-13E
Inventories 8,836 12,321 13,566 13,101 14,571
Net fixed assets 40,294 36,190 33,868 30,499 24,514
Intangible assets 109 168 168 168 168
Other assets 2,526 2,189 2,189 2,189 2,189
Total assets 68,126 70,394 74,448 74,508 77,892
Trade creditor 11,715 10,820 13,764 11,999 13,346
Short-term debt 1,989 8,835 8,517 11,956 14,019
Other liabilities - - - - -

Growth
12-09 12-10 12-11E 12-12E 12-13E
Revenue growth (28.0%) 25.1% 14.5% (2.9%) 11.7%
Operating EBIT growth (43.4%) 74.9% (53.6%) 27.9% 34.4%
Pretax profit growth (30.2%) 204.0% (68.2%) (0.8%) 80.1%
Net profit growth (44.7%) 180.7% (69.0%) (0.8%) 80.1%


12-09 12-10 12-11E 12-12E 12-13E
Pre-tax profit 563 1,711 545 540 974
Depreciation 4,821 4,858 3,921 3,957 5,570
Goodwill & other amort. - - - - -
Net interest 1,004 914 881 1,090 1,161
Change in working capital 716 (3,043) 336 (1,456) 245
Tax paid (158) (260) (68) (135) (243)
Other operating cash flow (84) (72) 762 630 983
Capex (1,613) (2,091) (2,000) (1,000) (1,000)
Cash flow from disposals 12 27 (402) (412) (416)
Acquisition of subsidiaries - - - - -
Others (2,125) 2,401 132 132 132
Cash flow from investing (3,726) 337 (2,269) (1,280) (1,283)
Debt issued (1,447) (276) 4,339 2,221 997
Dividends paid (10) (78) (120) (119) (214)
Interest paid (1,232) (503) (881) (1,090) (1,161)
Other cash flow from funding 69 (3,772) - - -
Cash flow from financing (2,620) (4,628) 3,338 1,012 (377)
Total cash generated 323 (395) 7,135 4,158 6,819
Free cash flow to firm 2,942 4,233 3,797 3,145 7,196
Free cash flow to equity 264 3,454 7,255 4,276 7,033

Key Ratios
12-09 12-10 12-11E 12-12E 12-13E
Profitability
EBITDA margin 12.3% 11.5% 7.0% 7.7% 9.6%
EBIT margin 2.7% 3.8% 1.6% 2.0% 2.5%
Pre-tax margin 1.1% 2.7% 0.8% 0.8% 1.2%
Net profit margin 0.8% 1.7% 0.5% 0.5% 0.8%
Liquidity
Current ratio 1.1 1.0 1.2 1.2 1.3
Interest coverage ratio 1.4 2.6 1.3 1.3 1.7
Net debt to equity 44% 53% 27% 17% Net cash
Quick ratio 0.7 0.6 0.7 0.8 0.9
Valuation
P/E (x) 42.8 15.2 49.1 49.5 27.5
Core P/E (x) 42.8 15.2 49.1 49.5 27.5
P/B (x) 0.6 0.6 0.6 0.6 0.6
P/CF (x) 2.5 4.3 2.8 3.8 2.0
EV/EBITDA (x) 4.6 4.3 4.8 4.0 2.0
Activity ratios
Inventory days 67.6 75.4 71.0 71.2 71.0
Returns
ROE 1.5% 4.1% 1.2% 1.2% 2.2%
ROAA 0.6% 1.6% 0.5% 0.5% 0.8%
ROACE 2.9% 5.0% 2.3% 2.9% 3.8%


Financial Summary (A shares)
12-09 12-10 12-11E 12-12E 12-13E
Total turnover 51,860 64,981 72,157 70,039 78,236
Cost of sales (49,326) (61,439) (69,776) (67,381) (74,941)
Total operating costs (1,425) (1,464) (1,259) (1,222) (1,365)
Deprec. and amort. (4,821) (4,858) (3,921) (3,957) (5,570)
Operating EBIT 1,109 2,078 1,122 1,436 1,930
Net interest income (939) (732) (881) (1,090) (1,161)
Other recurring income 189 146 109 - -
Associates' profit 204 220 195 195 204
Pre-tax profit 563 1,711 545 540 974
Taxation (29) (520) (136) (135) (243)
Net profit 392 1,102 342 339 611
Recurring net profit 392 1,102 342 339 611

12-09 12-10 12-11E 12-12E 12-13E
Earnings per share 0.05 0.14 0.04 0.04 0.08
Dividend/share 0.04 0.05 0.02 0.02 0.03
Tangible BVPS 3.4 3.5 3.6 3.7 3.8
Net cash/(debt) per share (1.5) (0.9) (1.0) (0.6) 0.2

12-09 12-10 12-11E 12-12E 12-13E
Inventories 8,989 12,452 13,711 13,240 14,726
Net fixed assets 40,294 36,190 33,868 30,499 24,514
Intangible assets - - - - -
Other assets 2,635 2,357 2,357 2,357 2,357
Total assets 67,983 70,103 74,074 74,131 77,520
Trade creditor 11,715 10,820 13,764 11,999 13,346
Short-term debt 1,173 977 8,517 11,956 14,019
Other liabilities 580 573 573 573 573

Growth
12-09 12-10 12-11E 12-12E 12-13E
Revenue growth (27.2%) 25.3% 11.0% (2.9%) 11.7%
Operating EBIT growth (46.4%) 87.4% (46.0%) 27.9% 34.4%
Pretax profit growth (30.1%) 204.0% (68.2%) (0.8%) 80.1%
Net profit growth (44.7%) 180.7% (69.0%) (0.8%) 80.1%


12-09 12-10 12-11E 12-12E 12-13E
Pre-tax profit 563 1,711 545 540 974
Depreciation 4,821 4,858 3,921 3,957 5,570
Goodwill & other amort. - - - - -
Net interest 939 732 881 1,090 1,161
Change in working capital 528 (3,043) 336 (1,456) 245
Tax paid (29) (520) (136) (135) (243)
Other operating cash flow 62 (425) 269 371 724
Capex (1,613) (2,091) (2,000) (1,000) (1,000)
Cash flow from disposals 12 27 (402) (412) (416)
Acquisition of subsidiaries - - - - -
Others (2,042) 56 435 187 183
Debt issued 141 (1,274) 4,339 2,221 997
Dividends paid (1,533) (62) (120) (119) (214)
Interest paid (1,232) (503) (881) (1,090) (1,161)
Other cash flow from funding (10) - - - -
Cash flow from financing (2,633) (1,838) 3,338 1,012 (377)
Total cash generated 392 (758) 7,116 3,953 6,610
Free cash flow to equity 1,935 (696) 7,235 4,072 6,824

Key Ratios
12-09 12-10 12-11E 12-12E 12-13E
Profitability
EBITDA margin 11.4% 10.7% 7.0% 7.7% 9.6%
EBIT margin 2.1% 3.2% 1.6% 2.0% 2.5%
Pre-tax margin 1.1% 2.6% 0.8% 0.8% 1.2%
Net profit margin 0.8% 1.7% 0.5% 0.5% 0.8%
Liquidity
Current ratio 1.1 1.0 1.1 1.2 1.3
Interest coverage ratio 1.2 2.8 1.3 1.3 1.7
Net debt to equity 41% 25% 26% 17% Net cash
Quick ratio 0.7 0.6 0.7 0.8 0.9
Valuation
P/E (x) 50.2 17.9 57.6 58.1 32.2
Core P/E (x) 50.2 17.9 57.6 58.1 32.2
P/B (x) 0.7 0.7 0.7 0.7 0.7
P/CF (x) 3.0 6.4 3.4 4.7 2.4
EV/EBITDA (x) 5.3 3.9 5.5 4.7 2.4
Activity ratios
Inventory days 66.5 74.0 71.7 71.9 71.7
Returns
ROE 1.5% 4.1% 1.2% 1.2% 2.1%
ROAA 0.6% 1.6% 0.5% 0.5% 0.8%
ROACE 2.3% 4.7% 2.5% 2.8% 3.7%



Company Update 1 February 2012
21%
BUY
Target Price: RMB6.20

600019 CH
Price: RMB 5.13
TP Basis: P/B
Sector Rating: NEUTRAL

Trading Summary
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
3
1
/
0
1
/
1
1
2
8
/
0
2
/
1
1
3
1
/
0
3
/
1
1
3
0
/
0
4
/
1
1
3
1
/
0
5
/
1
1
3
0
/
0
6
/
1
1
3
1
/
0
7
/
1
1
3
1
/
0
8
/
1
1
3
0
/
0
9
/
1
1
3
1
/
1
0
/
1
1
3
0
/
1
1
/
1
1
3
1
/
1
2
/
1
1
3
1
/
0
1
/
1
2
0
500
1,000
1,500
2,000
2,500
Baoshan Iron & Steel Co-A FTSE-Xinhua A50
Turnover (Rmb m) Rmb

(%) YTD 1M 3M 12M
Absolute 4.9 4.9 (3.4) (26.3)
Relative to FTSE Xinhua
China A50 Index
(1.5) (1.5) 0.4 (13.0)

Shares outstanding 17,512
Free float (%) 100
Daily turnover (3M avg.) 146
Net debt/equity (%) (2012 E) 20
Major shareholders (%)
Shanghai Baosteel Group 75
Sources: Company data, Bloomberg, BOCI Research
Closing prices are as of 31 January 2012

LE Yukun
(8621) 2032 8559
yukun.le@bocigroup.com

_________
*Hang Yijun made major contributions to this report
Baoshan I&S
Leading domestic manufacturer of carbon steel plate
Baoshan I&S (Baosteel) is the most advanced steel producer in
China. Its cold & hot-rolled product and medium thick plate are
positioned at the high end, which affords the company high added
value and strong competitiveness internationally. The listco is
planning to sell off the underperforming businesses of stainless
steel and special steel to the group, which will enhance asset quality
and boost profitability. This will also help solidify the companys
leading position in the carbon steel plate segment. Furthermore,
Baosteel Groups stake increases in late September 2011 and early
January 2012 reflect its confidence in the listcos future development
prospects. We reaffirm our respective EPS estimates for 2012-13 of
RMB0.48 and RMB0.52, and reiterate our BUY rating on the stock.

Key Points for Rating
The company is a leading domestic manufacturer of carbon steel plate with
marked advantages in terms of its high-end market positioning, strong
profitability and counter-cyclical resilience.
Disposal of the special steel and stainless steel segments will help boost
Baosteels profitability and asset quality as well as cement its predominant
position in the carbon steel field.
The group raised its stake in the listco in late September 2011 and early 2012,
demonstrating the parents conviction in Baosteels future direction.
Key Risks to Rating
Slowing growth of demand for carbon steel in the downstream and lack of
catalysts for price hikes.
Slower-than-expected corrections in iron ore and coke prices.
Valuation
We value the company at 1x 2011 P/B, giving us a target price of RMB6.20. Our
BUY rating remains unchanged.

Investment Summary
Year ended 31 Dec 12-09 12-10 12-11E 12-12E 12-13E
Change (%) - 36 9 (10) 7
Net profit (RMB m) 5,742 12,786 7,239 8,380 9,101
Change (%) - 123 (43) 16 9
Previous EPS (RMB) 0.328 0.736 0.413 0.440 0.476
Change (%) - - -- 9.1 9.2
FD P/E (x) 14.6 6.6 11.7 10.1 9.3
P/CF (x) 3.5 4.4 6.6 2.8 2.2
EV/EBITDA (x) 14.3 7.3 5.0 2.9 1.5
Dividend yield/share (RMB) 0.180 0.300 0.177 0.203 0.220
Dividend yield (%) 3.71 6.19 3.64 4.19 4.54
Sources: Company data, BOCI Research estimates

Year ended 31 Dec 2009 2010 2011E 2012E 2013E
Revenue 148,326 202,149 220,076 198,689 212,964
Cost of sales (134,332) (177,817) (201,336) (179,143) (191,883)
Operating expenses (exclude
depreciation & amortisation)
(5,139) (6,963) (8,209) (7,650) (8,519)
EBITDA 22,160 30,670 23,424 24,697 25,170
Depreciation & amortisation (13,306) (13,300) (12,893) (12,801) (12,607)
Operating profit (EBIT) 8,855 17,369 10,531 11,896 12,563
Net interest
income/(expenses)
(1,676) (807) (1,062) (890) (627)
Other gains/(losses) 41 410 447 403 432
Pre-tax profit 7,220 16,973 9,916 11,410 12,368
Tax on profit (1,199) (3,715) (2,182) (2,510) (2,721)
Net profit 5,742 12,786 7,239 8,380 9,101
Core net profit 5,742 12,786 7,239 8,380 9,101
EPS (RMB) 0.328 0.730 0.413 0.479 0.520
Core EPS (RMB) 0.328 0.730 0.413 0.479 0.520
DPS (RMB) 0.180 0.300 0.177 0.203 0.220
Revenue growth (%) (26.0) 36.3 8.9 (9.7) 7.2
EBIT growth (%) n.a. 96.2 (39.4) 13.0 5.6
EBITDA growth (%) n.a. 38.4 (23.6) 5.4 1.9
EPS growth (%) n.a. 122.7 (43.4) 15.8 8.6
Core EPS growth (%) n.a. 122.7 (43.4) 15.8 8.6

As at 31 Dec 2009 2010 2011E 2012E 2013E
Cash & cash equivalents 5,558 9,201 13,205 35,774 70,183
Receivables 12,241 14,609 25,309 32,784 26,620
Inventories 29,462 38,027 44,294 41,203 44,133
Fixed assets 115,466 117,737 107,733 89,185 75,409
Intangible assets 7,837 8,149 7,742 7,334 6,927
Other long term assets 25,173 21,314 18,930 5,085 6,761
Total assets 201,143 216,065 224,844 218,290 237,370
Creditors 18,583 19,164 20,134 21,497 23,026
Short-term debt 24,274 23,611 18,725 0 0
Long-term borrowings 5,295 8,587 8,597 4,597 4,587
Other long-term liabilities 23,907 22,960 23,139 22,925 23,068
Share capital 17,512 17,512 17,512 17,512 17,512
Reserves 77,726 87,364 91,510 96,329 101,572
Minority interests 6,082 6,596 7,091 7,612 8,158
Book value per share (RMB) 5.43 5.98 6.22 6.49 6.79
Tangible assets per share
(RMB)
4.99 5.52 5.78 6.07 6.40
Net debt/(cash)per share
(RMB)
7.28 4.34 2.35 (0.40) (0.69)

Pre-tax profit 7,220 16,973 9,916 11,410 12,368
Depreciation & amortisation 13,281 13,269 12,893 12,801 12,607
Net interest expenses 1,676 807 1,062 890 627
Change in working capital 18,056 4,312 (13,314) (47,241) (65,670)
Tax paid (1,199) (3,715) (2,182) (2,510) (2,721)
Other operating cash flows (14,892) (12,225) 4,582 54,609 81,650
Cash flow from operations 24,140 19,421 12,957 29,958 38,861
Net purchase of fixed assets (18,236) (13,246) (100) 20,000 (100)
Decrease/(increase) in invest. 744 91 0 0 0
Other investing cash flows 0 545 0 0 0
Cash flow from investing (17,492) (12,610) (100) 20,000 (100)
Net increase in equity 0 0 0 0 0
Net increase in debt (8,907) 3,292 10 (4,000) (10)
Dividends paid (3,152) (5,254) (3,094) (3,560) (3,859)
Other financing cash flows 5,793 (402) (5,750) (19,811) (469)
Cash flow from financing (7,942) (3,167) (8,853) (27,388) (4,353)
Change in cash (1,294) 3,643 4,004 22,570 34,409
Cash at beginning of year 6,852 5,558 9,201 13,205 35,774
Free cash flow to equity (3,935) 9,299 12,848 45,941 38,736

Key Ratios
Profitability (%)
EBITDA margin 14.9 15.2 10.6 12.4 11.8
EBIT margin 6.0 8.6 4.8 6.0 5.9
Pre-tax margin 4.9 8.4 4.5 5.7 5.8
Net profit margin 3.9 6.3 3.3 4.2 4.3
Liquidity (x)
Current ratio 0.7 0.9 1.2 1.7 1.8
Interest coverage 5.3 21.5 9.9 13.4 20.0
Net debt to equity (%) 25.2 21.9 12.9 (27.4) (55.1)
Quick ratio 0.3 0.4 0.6 1.1 1.3
Valuation (x)
P/E 14.6 6.6 11.7 10.1 9.3
Core P/E 14.6 6.6 11.7 10.1 9.3
Core P/E @ target price 18.7 8.4 15.0 13.0 11.9
P/B 0.8 0.8 0.7 0.7 0.7
P/CF 3.5 4.4 6.6 2.8 2.2
EV/EBITDA 14.3 7.3 5.0 2.9 1.5
Activity ratios
Inventory days 72.5 68.7 73.5 75.7 75.6
Returns (%)
Dividend payout ratio 51.7 39.3 40.0 40.0 40.0
Return on equity 6.0 12.0 6.7 7.3 7.6
Return on assets 2.9 6.0 3.2 3.8 3.8
Return on capital employed 4.4 7.9 4.8 6.0 6.1

APPENDIX I. PRODUCTION FLOW CHARTS
Figure 86. Value Chan of domestic iron ore industry
Steel-making, 90%
Casting, 10%
Pig iron Blast furnaces
Concentrates, 95%
Value chain of domestic iron ore industry
Lumps, 5%
Iron ore mines
Steel-making, 90%
Casting, 10%
Pig iron Blast furnaces
Concentrates, 95%
Value chain of domestic iron ore industry
Lumps, 5%
Iron ore mines

Source: Steelease, BOCI Research

Figure 87. Typical Beneficiation Flow Chart
ROM
Grinding
Crushing
Magnetic separation
Concentrate
Typical Beneficiation Flow Chart
ROM
magnetic pulley
primary crushing
mullock
autogenous mill
demagnetizer
spiral classifier
ball mill
demagnetizer
magnetic separation
filtration
circulating
water
conc.
tailings
conc. tailings
thickener
scavenging
thickener
magnetic separation
magnetic separation
ROM
Grinding
Crushing
Magnetic separation
Concentrate
Typical Beneficiation Flow Chart
ROM
magnetic pulley
primary crushing
mullock
autogenous mill
demagnetizer
spiral classifier
ball mill
demagnetizer
magnetic separation
filtration
circulating
water
conc.
tailings
conc. tailings
thickener thickener
scavenging scavenging
thickener thickener
magnetic separation magnetic separation
magnetic separation magnetic separation

Source: Steelease, BOCI Research

LISTED COMPANIES IN THIS REPORT
Angang Steel (347 HK/HK$5.44, HOLD; 000898 CH/RMB4.58, BUY)
Anyang Iron & Steel (600569 CH/RMB2.74, NR)
Ba Yi Iron & Steel (600581 CH/RMB7.89, NR)
Baoshan Iron & Steel (600019 CH/RMB5.09, BUY)
Baotou Steel (600010 CH/RMB4.87, NR)
Beijing Shougang (000959 CH/RMB2.87, NR)
Bengang Steel (000761 CH/RMB4.62, NR)
Changli Auto Spring (600507 CH/RMB4.37, NR)
Chongqing Iron & Steel (1053 HK/HK$1.21, NR)
Daye Special Steel (000708 CH/RMB 10.00, BUY)
Fushan Special Steel (600399 CH/RMB4.40, NR)
Gansu Jiu Steel (600307 CH/RMB4.02, NR)
Hangzhou Iron & Steel (600126 CH/RMB4.10, NR)
Hebei Iron & Steel (000709 CH/RMB2.99, NR)
Hunan Valin Steel Tube (000932 CH/RMB2.87, NR)
IRC Corporation (1029 HK/HK$1.16, NR)
Jinan Iron & Steel (600022 CH/RMB3.42, NR)
Jiuli Hi-tech Metals (002318 CH/RMB16.14, NR)
Laiwu Steel (600102 CH/RMB7.14, NR)
Lingyuan Iron & Steel (600231 CH/RMB5.34, NR)
Liuzhou Iron & Steel (601003 CH/RMB3.78, NR)
Maanshan Iron & Steel (323 HK/HK$2.68, SELL; 600808 CH/RMB2.56,
HOLD)
Nanjing Iron & Steel (600282 CH/RMB2.87, BUY)
Sansteel Minguang (002110 CH/RMB7.38, NR)
SGIS Songshan (000717 CH/RMB2.73, NR)
Shagang (002075 CH/RMB4.45, NR)
Shanxi Taigang Stainless Steel (000825 CH/RMB6.27, BUY)
Shougang Concord (697 HK/HK$3.85, NR)
Wuhan Iron & Steel (600005 CH/RMB3.01, NR)
Xinhua Metal Products (600782 CH/RMB4.84, NR)
Xining Special Steel (600117 CH/RMB7.12, NR)
Xinxing Ductile Iron Pipes (000778 CH/RMB6.78, NR)
Zhejiang Jiuli Hi-tech Metals (002318 CH/RMB16.14, NR)
Zhongyuan Special Steel (002423 CH/RMB7.89, NR)

Prices as of 31 January 2012
All figures subject to rounding

DISCLOSURE

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