Baosteel Co.,Ltd Alert:Positive guidance on FY2016,Buy reiterated

FY2015 results in line with expectation.

    Baosteel announced its FY15 results on PRC GAAP after market close on Mar30. Baosteel recorded revenue of RMB164bn in FY2015, achieving 100%FY15DBe and 100% Bloomberg consensus. Baosteel’s NPAT attributable toshareholders was RMB1,013mn, achieving 105% FY15DBe and 105%Bloomberg consensus, in line with expectation. As the company has alreadyannounced profit alert on Jan.20th, 2016, we believe these results should benon-event to share price.

    Deteriorated profitability, significant non-recurring cost.

    Baosteel’s profitability was deteriorated in FY2015. Company’s average unitgross profit of major products fell from RMB540/t in FY2014 to RMB399/t inFY2015 (ASP declined by RMB943/t and unit cost declined by RMB802/t.) Nonrecurringcost including net financing cost (loss from foreign exchange) andimpairment loss on inventory was significant in FY2015. However, as Baosteelalready cut the US dollar debt in 2015 and current steel price is running at verylow level, we would not expect huge cost in these two items again in FY2016.

    Strong balance sheet and healthy cash flow from operation.

    Baosteel maintains a strong balance sheet and healthy cash flow fromoperation Baosteel successfully cut net gearing ratio from 32.1% as of 2014year end to 30.6% as of 2015 year end. Its AR days and inventory days weresteadily at 40 days and 61 days, respectively while its AP days increased to 61days in FY2015. Cash flow from operation kept at positive RMB21bn in FY2015Positive guidance on FY2016.

    With increasing steel sales volume to 27.11mt, Baosteel guidance its FY2016revenue at RMB160bn and operating cost at RMB149bn, implying a recurringPBT of c.RMB10bn, better than DBe of RMB8bn. Baosteel will invest CAPEX ofRMB14bn in FY2016, including RMB6.3bn for Zhanjiang project. We believethat with the ramp-up of Zhanjiang project, company’s profitability willgradually improve.

    Quality company with quality volume growth, Buy maintained.

    We remain a cautious view on China steel industry as we have not seen anysignificant improvements in supply/demand balance yet. However, as Baosteelhas been consistently outperforming its peers in term of profitability, andBaosteel is the only company under our coverage that we believe can benefitfrom quality volume growth in the coming two years. Buy reiterated.