For the first nine months of 2008, the company's operating profit and net profit attributable to the parent were RMB 58.1 bln and RMB 7.17 bln respectively, while EPS came in at RMB 0.92. Third quarter operating profit and net profit attributable to the parent were RMB 20.8 bln and RMB 2.26 bln, up 39.% and 40.3% respectively, while EPS reached RMB 0.29.

Influenced in 2H 2008 by falling domestic steel prices, the company's third quarter operations were down from 2Q '08. However, the 21% slide in 3Q '08 net profit is comparatively less than rivals AnSteel and BaoSteel, which declined by 36% and 47% respectively. The company attributed the distinction to its silicon steel products, which were responsible for 60% of profit. Prices for these niche products remain strong due to substantial drops in domestic prices for common steel. No wonder then that silicon steel has become the company's most stable source of profit in a highly cyclical industry and a crucial hedge against sector volatility.

The gloomy global economy, slumping steel prices and anemic demand are the main factors threatening the company at the moment. Operating cash flow at the end of 3Q was down 9.4% from the last quarter. Costs continue to soar and inventory is expected to rise by as much as 118% YOY. 4Q inventory depreciation provisions will be increased accordingly.

EPS projections for 2008 and 2009 have been cut to RMB 1.06 and RMB 1.03 respectively. In contrast to overall market contraction anticipated in 2009, the company's performance is expected to remain stable on the strength of its silicon steel products. A relatively high 40% dividend distribution rate, around RMB 0.3, leads us to maintain a 'Buy' rating on the stock.

Since the start of November, the company dramatically lowered prices for its common steel products by RMB 1,200 per ton. The company's unrivaled silicon steel products however, allow for continued premium pricing.


Source: Guotai Jun'an Website

Date: 5 Nov 2008

CN01/VW/SW/MM