Baosteel Co.Ltd.Alert:Synergies started to generate at early stage,Buy reiterated

Strong 1Q17 results reported.

    Baosteel reported FY16 and 1Q17 results on 28 April 2017. Considering thatBaosteel already announced preliminary FY16 results on 18 Jan 2017, webelieve its FY16 earnings should be a non-event. The company’s 1Q17 revenuereached RMB85bn, achieving 26% Bloomberg consensus. A strong 1Q17NPAT of RMB3.79bn was delivered, reaching 32% Bloomberg consensus.

    Considering that this is the first result after the merger, Bloomberg consensusmay not be comparable.

    Early win synergies emerged.

    Baosteel managed to generate strong profitability. Its EBITDA/t of 1Q17reached RMB1083/t. We believe the strong profitability should be contributedby not only the improved steel spread, also the emerging M&A synergy. Givenindependent EBITDA/t records of Baosteel and Wuhan Steel before the merger,together with steel spreads we tracked, it should be a struggle for post-mergerEBITDA/t to reach RMB1000/t. The synergy emerging at initial stagedemonstrated an early win in our view.

    Strong earnings of 2017 expected.

    Baosteel’s profitability in 2Q17 may decline as the avg. 2Q17 QTD HRC spreadhas deteriorated by c.RMB250/t than that in 1Q17. However, we forecastindustry profitability is likely to recover in 2H17 and beyond. See our report“Reading through Chinese HRC volatilities” published on 21 April, 2017.

    Adding up the increasing synergy with the continuous integration and furtherramp-up of Zhanjiang project (Zhanjiang project has already started tocontribute profit in 1Q17, earlier than previous expectation), we believe theremay not be too much discrepancy to map full year earnings by annualizing firstquarter bottom line. We expect Baosteel should be able to realize ROAE ofc.10% in FY17.URemain optimistic about long term industry structural change, Buy reiterated.

    Baosteel is currently trading at 0.8x FY17DBe BVPS. The valuation isundemanding, given an expected ROAE of FY17 at c.10%. The sustainablestructural change in China steel industry should be able to improve overallindustry utilization rate and profitability in the long term, we reiterate Buy onBaosteel.