Basic Materials 29-Jan-2016 REG FN edited2...Regional Industry Focus Basic Materials Page 3 China: Net export -40-20 0 20 40 60 80 100 120 140 1996 1998 2000 2002 2004 2006 2008 2010

ed: TH / sa: YM

CRB Index : 566.29

Analyst LEE Eun Young +65 6682 3708 [email protected]

Addison DAI +852 2971 1931 [email protected]

STOCKS

Source: DBS Bank, DBS Vickers

China : Overcapacity of crude steel(capacity-

consumption)

‐100,000

0

100,000

200,000

300,000

400,000

500,000

2001 2003 2005 2007 2009 2011 2013 2015F 2017F 2019F

(m ton)

Source: CEIC, DBS Bank

DBS Group Research . Equity 1 Feb 2016

Regional Industry Focus

Basic Materials Refer to important disclosures at the end of this report

China's restructuring plan to mitigate investors’ poor sentiment

China will cut 100-150m ton of crude steel capacity and reduce coal capacity

Limited near-term impact as there are no concrete execution measures and specific time line

To ease investors' negative sentiment and offer trading BUY opportunity

Top picks: Hyundai Steel & Bao Steel

What’s new? PRC government announced capacity cuts

for steel and coal. China will cut crude steel production by 100-150m ton according to an official statement by the Chinese cabinet chaired by Premier Li Keqiang on 25 Jan. It will also reduce coal capacity by "a relatively large margin," the statement said. Since 2011, the China government has been reducing excess capacity, especially in Oct 2013. China’s State Council announced the targeted closure of 80m ton of capacity by the end of 2017. Since July 2014, China’s Ministry of Industry and Information Technology (MIIT) has revealed lists of steelmakers that should remove obsolete capacities (blast

furnaces below the size of 400㎥ have been forced to shut

down). Also, provincial governments were requested to submit, by 30 June 2015, their targets for dismantling outdated and excess capacities in 2015 and during the 13th five-year (2016-2020) economic development plan. What’s the impact? No imminent changes in

fundamentals but easy negative sentiment. However, the government hasn’t announced the detailed execution plan and timeline. We estimate overcapacity of crude steel in China to be c.300m ton, which would be c.27% of total steelmaking capacity. When the 150m ton of capacity comes to a close for the next five years, 30m ton of capacity would be cut every year. This calculation suggests that the overcapacity situation is likely to remain despite the decline in tonnage of overcapacity. However, we believe the negative sentiment of investors toward the sector would abate, thanks to the news.

Our recommendation: Trading opportunity. We believe the current steel prices and iron ore prices are likely to rebound in the near term given that i) decline of Chinese steel production has been accelerated due to production cut of mills, ii)Mills are struggling to support steel product prices as they are facing losses, and iii)Iron ore prices are rebounding although price growth will not be sustainable. Our top picks are Hyundai Steel and Bao Steel.

Price Mkt Cap Target Price Performance (%)

KRW US$m KRW 3 mth 12 mth Rating

POSCO 174,500 12,593 190,000 (6.9) (34.4) HOLD Hyundai Steel Company

47,750 5,274 73,000 (10.8) (25.7) BUY

Seah Besteel Corporation

23,800 706 41,000 (18.8) (21.5) BUY

Baoshan Iron & Steel Co-A

5.18 12,979 7.14 (10.4) (15.2) BUY

Angang Steel 3.54 3,288 3.09 9.9 (38.0) HOLD Maanshan Iron & Steel

1.41 1,394 1.04 (15.6) (33.2) FV


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Page 2

China’s fight with overcapacity In the Chinese cabinet meeting, the government announced the official statement on the steel and coal industry restructuring as per below: Firstly, the adoption of more rigorous standards on safety, quality, and energy consumption to eliminate outdated capacity. Enterprises can slash capacity through mergers and acquisitions, transformation or relocation. China will cut another 100-150m tons of crude steel production based on the elimination of 90m ton of capacity over the years. Secondly, to strictly control new industrial capacity. In principle, China will stop approving new coal mines, and will adopt technological innovations for new industrial capacity. Thirdly, to improve supporting policies such as establishing special funds for industrial enterprises to adjust structures; supporting social capital to participate in corporate acquisitions and reorganisations, and taking various measures to resettle the possible laid-off workers. The global steel industry has seen the necessity for capacity cuts in the Chinese steel sector and China's government has also been trying to restructure the industry since 2011. The Chinese government had been targeted to reduce steel capacity by 80m ton from 2013-2017 and since July 2014, China’s Ministry of Industry and Information Technology (MIIT) has revealed lists of steelmakers that should remove obsolete capacities. MIIT announced on 24 Dec 2015 that 17m ton of capacity was eliminated in 2015. Total capacity in China has been growing despite capacity cut. China’s capacity increase: 30m ton (2015), 28m ton (2016)

We estimate crude steel-making capacity in China to be c.1.15bn ton in 2015 which would be a historical record. According to Mysteel, the addition of steel capacity is estimated to be 29.65m ton and 67% of them are SOE projects. Hence, the net addition of capacity after taking into account obsolete plants is estimated to be 13m ton. Also there are capacity expansion plans of 12 units of blast furnace (c.27.9m ton) in 2016 following Mysteel’s survey. However the actual capacity expansion would be lower than this survey because of current depressed market condition.

Total capacity to peak out but modest decline expected We have factored in a 30m ton of capacity cut every year for the next five years, as per the Chinese government’s announcement of a 150m ton cut under China’s 13th 5-year plan (2016-2010). When we take account into our capacity calculation, total capacity of crude steel is estimated to peak out in 2015 and start to decline from 2016. However, the decline should not be significant and total capacity may remain above 1bn ton. The utilisation ratio of China steel is estimated to be at 70% in 2015 and is likely to remain at c.70-75% for next five years. China: Crude steel capacity

0

200

400

600

800

1,000

1,200

1,400

50%

55%

60%

65%

70%

75%

80%

85%

90%

95%

2001 2003 2005 2007 2009 2011 2013 2015F 2017F 2019F

(m ton) Utilisation ratio Crude steel capacity

Source: CEIC, POSRI, DBS Bank, China's net export is a huge burden on the regional market Super strong growth of China’s export China’s overcapacity has caused the strong growth of export in the region. China’s export has been increasing 2.6 folds for the last five years with a whopping 50.4% and 19.8% growth in 2014 and 2015, respectively. The export was 112.4m ton in 2015 which is slight lower than US’s steel consumption of 121m ton. Of note, US is the 2nd largest steel consumption country in the world. Although taking account import of China, net export registered 99.6m ton in 2015. Going forward, we expect China's implied net export (capacity-consumption) to decline from the peak of 104m ton in 2016 following the government's effort to cut capacity. However, the absolute volume of overflow from China should pose a significant burden to regional steel prices. With the aggressive restructuring and strong slash of overcapacity in China, Chinese SOE steel mills and Korean large mills in our coverage will be key beneficiaries.


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Page 3

China: Net export

-40

-20

0

20

40

60

80

100

120

140

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

(m ton)

Net Steel Export(Crude Steel)

Steel Product Import

Steel Product Export

Source: CEIC, DBS Bank China: Implied net export

‐60

‐40

‐20

0

20

40

60

80

100

120

2001 2003 2005 2007 2009 2011 2013 2015F 2017F 2019F

(m ton)

Source: CEIC, POSRI, DBS Bank

Biggest export markets: Korea & ASEAN. About 12% of exports from China had headed to Korea in 2015, representing c.20% of Korea’s consumption. The reason for strong export to Korea is cheap transportation cost due to short distance and no trade barriers supported by FTA. Vietnam is the second largest export destination accounting for 9% of export. Philippines, Indonesia and Singapore are the major export markets. This shows clearly that the steel companies’ earnings have been dampened by the cheap Chinese steel imports' profitability and gloomy outlook on the earnings improvement. China: Major export market of steel products

South Korea, 12% Vietnam, 9%

Philippine, 5%

Indonesia, 5%

India, 4%

Singapore, 3%

Thailand, 4%

Malaysia, 3%Hong

Kong, 2%

USA, 2%

Taiwan, 2%

Saudi Arabia, 2%

Belgium, 2%

Italy, 2%

Iran, 2%

Others, 40%

Source: CEIC, DBS Bank


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Page 4

Stock performance – Relatively outperforming since beginning of this year

Share price performance: Bao Steel was the best performer among regional peers in 2015. Since the beginning of this year, share prices of steel stocks have been outperforming by merely falling less, as negative fundamentals have been priced in and as they approach historical low valuations. SOE steel mills in China and Korea large mills will be beneficiaries of sector restructuring

Korea/Japan POSCO HYUNDAI STEEL CO

SEAH BESTEEL CORP

NIPPON STEEL CORP

JFE HOLDINGS INC

TOKYO STEEL MFG CO LTD

WUHAN IRON & STEEL CO

LTD-A

SHANDONG IRON AND

STEEL CO-A 1wk % 9.8 8.7 3.8 3.6 2.3 9.7 (6.2) (10.5) 1month % (2.0) (10.1) (17.3) (10.7) (14.8) 1.7 (13.8) (17.1) 3month % (7.4) (13.2) (29.0) (14.7) (14.0) (1.5) (21.2) (20.2) ytd % 4.2 (3.2) (12.7) (11.9) (14.2) 4.4 (12.7) (17.4) 1 year % (34.8) (24.8) (8.2) (27.7) (37.6) (14.4) (9.3) (12.6) Relative performance, %, ytd 8.5 0.5 (9.2) (2.4) (5.0) 15.6 14.9 8.0

HK/China /Others BAOSHAN

IRON & STEEL CO-A

ANGANG STEEL CO

LTD-H

MAANSHAN IRON & STEEL-

H CHINA STEEL CORP

TATA STEEL LTD

UNITED STATES STEEL

CORP NUCOR CORP

ARCELORMITT

AL-NY REGISTERED

1wk % (6.4) (2.5) (5.8) 4.1 8.1 7.8 3.6 11.3 1month % (6.2) 6.4 (14.6) (2.5) (3.2) (10.0) (11.0) (14.5) 3month % (9.9) 6.8 (16.6) (14.0) 3.6 (27.5) (13.8) (29.5) ytd % (5.4) 10.2 (12.0) (1.1) (1.9) (2.6) (9.3) (6.6) 1 year % (13.6) (39.4) (30.8) (33.4) (36.0) (63.5) (18.5) (59.0) Relative performance, %, ytd 24.1 27.1 1.1 5.2 4.7 4.5 (2.6) 0.2

Based on share prices as of 26 Jan Share price: POSCO vs. Hyundai Steel Share price: Bao Steel vs. Maanshan

0

20

40

60

80

100

120

140

160

0

100

200

300

400

500

600

700

11.1 11.7 12.1 12.7 13.1 13.7 14.1 14.7 15.1 15.7 16.1

(k KRW)(k KRW)POSCO(L)

Hyundai Steel(R)

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

10

12

14

16

18

20

22

24

26

28

30

11.1 11.7 12.1 12.7 13.1 13.7 14.1 14.7 15.1 15.7 16.1

(HK$)(k RMB)

BaoSteel(L) Maanshan(R)

Source: Bloomberg Finance L.P., DBS Vickers, DBS Bank

Share price: Korea zinc vs. Poongsan Share price: Korea zinc vs. Poongsan

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

09.1 10.1 11.1 12.1 13.1 14.1 15.1 16.1

(U$)

US Steel Nucor

15

17

19

21

23

25

27

29

31

33

35

100

200

300

400

500

600

700

800

09.1 10.1 11.1 12.1 13.1 14.1 15.1 16.1

(TWD)(IDR)

Tata Steel China Steel

Source: Bloomberg Finance L.P., DBS Vickers, DBS Bank


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Page 5

Sector valuation: P/BV multiple gap between HK Metal & Mining sector and Korean Basic Metal sector at its widest since 2007. This is because the ROE gap between them has widened. P/BVs in both the markets are now far below historical average since 2007.

P/BV: HSI vs KOSPI Metal & Mining Index ROE: HSI vs KOSPI Metal & Mining sector

3.4

1.31.0

1.31.5

0.8 0.8

1.31.6

1.41.2

1.0 1.1 1.01.2

1.5

0.70.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

07 08 09 10 11 12 13 14 15F

(x)

HK

Korea

Source: IBES, DBS Bank, DBS Vickers

6.3

14.5

7.1

14.2

24.4

10.8

4.0

11.910.6

16.615.1

9.5

12.112.6

8.66.4

4.43.0

0

5

10

15

20

25

30

07 08 09 10 11 12 13 14 15F

(%)

HK

Korea

Trailing P/BV: HSI Metal & Mining index Trailing P/BV: KOSPI Basic Metal Index

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

HONG KONG-DS Ind. Met & Mines - PRICE/BOOK

Avg

-1sd

+2sd

+1sd

Source: Bloomberg Finance L.P., DBS Bank, DBS Vickers

0.0

0.5

1.0

1.5

2.0

2.5

2007 2009 2011 2013 2015

KOREA-DS Ind. Met & Mines - PRICE/BOOK RATIO

Avg

-1sd

-2sd

+1sd

+2sd

Trailing P/E: HSI Metal & Mining index Trailing P/E: KOSPI Basic Metal Index

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

HONG KONG -DS Ind. Met & Mines - (PE)

Avg

+1sd

+2sd


-5.0

0.0

5.0

10.0

15.0

20.0

25.0

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

KOREA-DS Ind. Met & Mines - (PE)

Avg

-1sd

+1sd

+2sd


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Page 6

Global peers comparison:

Steel players’ ROE are projected to be lower than 5%, hence they are trading at 0.5x P/BV multiple. Meanwhile, some non-ferrous metal players including Korea Zinc and US Rusal are estimated to register higher ROEs, hence the premiums on their valuations would be justified.

Market Cap

(US$) PER PBR EV/EBITDA ROE

FY15F FY16F FY15F FY16F FY15F FY16F FY15F FY16F

Korea listed players

Posco 12,408 166.5 12.3 0.4 0.4 6.4 6.4 0.3 2.8

Korea Zinc 6,647 15.4 12.2 1.6 1.4 8.1 6.7 10.9 12.4

Hyundai Steel 5,179 8.3 7.2 0.4 0.4 6.6 6.3 5.0 5.3

Seah Besteel 705 5.0 6.3 0.6 0.5 6.1 6.2 11.0 8.2

Poongsan 536 11.7 9.2 0.6 0.6 9.4 8.5 5.4 6.5

HK-listed players Aluminum Corp of China 7,771 N/A N/A 0.8 0.9 14.6 15.5 (2.5) (6.1)

United Co. Rusal 4,016 3.3 5.1 1.7 1.3 6.1 9.5 43.7 20.0

Jiangxi Copper 5,256 12.7 14.2 0.5 0.5 8.7 9.8 3.7 3.5

Zinjin Mining 8,388 14.3 13.7 1.0 0.9 11.8 10.5 7.8 8.0

Angang Steel 4,632 N/A N/A 0.5 0.5 11.7 9.3 (2.8) (0.9)

Maanshan Steel 2,816 N/A N/A 0.5 0.5 37.8 14.7 (15.2) (7.8)

China A-share listed players

Baosteel-A 12,835 25.2 18.2 0.7 0.7 9.0 7.8 3.0 4.5

Wuhan Iron & Steel-A 4,662 N/A 35.6 0.9 0.9 12.5 10.6 (2.4) 1.8

Hebei Iron & Steel-A 5,066 56.4 45.8 0.8 0.8 14.0 14.0 1.3 1.4

Angang-A 4,632 N/A N/A 0.7 0.7 11.1 9.1 (2.6) (0.8)

Maanshan Steel-A 12,835 25.2 18.2 0.7 0.7 9.0 7.8 3.0 4.5

Asian listed steel players:

China Steel Corp. 8,368 29.9 41.4 0.9 0.9 11.6 11.9 3.2 2.4

Tata Steel 8,393 17.3 9.7 0.5 0.5 8.0 6.9 2.9 4.9

Steel authority of India 9,426 12.2 9.7 2.3 2.0 4.4 4.1 19.2 19.7

JFE 8,393 17.3 9.7 0.5 0.5 8.0 6.9 2.9 4.9

Nippon Steel 11,679 23.6 17.0 1.5 1.5 8.5 7.3 6.2 8.6

Nisshin Steel 5,179 8.3 7.2 0.4 0.4 6.6 6.3 5.0 5.3

Kobe Steel 3,350 17.9 9.4 0.5 0.5 5.6 5.1 3.2 5.8

Source: Bloomberg Finance L.P, DBS Bank, DBS Vickers


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Page 7

Major prices: Spot Iron ore prices have fallen to US$40/ton (Fe content 62%), but have remained at the U$40/ton supporting level. They are now rebounding, albeit with very weak recovery strength. Following the iron ore price rebound, benchmark steel prices are also rebounding and the margins are likely to remain at the current low level, thereby preventing further deterioration.

Spread between China HRC prices and spot iron ore prices Spread between Benchmark HRC prices and contract basis iron ore prices

150

250

350

450

550

650

750

0

50

100

150

200

250

10.11 11.5 11.11 12.5 12.11 13.5 13.11 14.5 14.11 15.5 15.11

(US$/ton)(US$/ton) Spread(R)

China import Iron Ore Fines 62% Fe spot

HRC benchmark prices

0

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450

0

100

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800

1Q10 1Q11 1Q12 1Q13 1Q14 1Q15

(US$/ton)(US$/ton) Spread

Bench mark HRC prices

Input cost of iron ore and coking coal per ton of steel


Spot iron ore prices China: Coke prices

0

50

100

150

200

250

09.01 10.01 11.01 12.01 13.01 14.01 15.01 16.01

(U$/ton)China import Iron Ore Fines 62% Fe spot (CFR Tianjin port) USD/dry metric tonne

Iron Ores Fines 63.5% Fe Offshore Export Price India to China CIF

0

50

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150

200

250

300

350

400

0

100

200

300

400

500

600

10.01 11.01 12.01 13.01 14.01 15.01 16.01

(US$/ton)(RMB/ton)China Foundry Coke Domestic Spot Price Shanghai

Coking Coal Queensland Index CCQ - Delayed



Basic Materials

Page 8

Most of the prices in the sector from upstream and downstream have dropped. All the prices in the steel and steel raw materials have recorded lows since 2010.

Steel scrap prices Steel prices: Billet & Slab

0

100

200

300

400

500

600

11.03 12.03 13.03 14.03 15.03

(US$/ton) US domestic Shredded Obsolete Scrap (Delivered Midwest mill) per long ton

Turkey import Heavy Melt Scrap #1&2 80:20 (CFR Turkish port) per metric tonne

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600

800

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1,400

07.01 08.01 09.01 10.01 11.01 12.01 13.01 14.01 15.01 16.01

(US$/ton)Steel CIS Export Billet $ per tonne Black Sea/Baltic Sea

Steel CIS Export Slab $ per tonne Black Sea/Baltic Sea

World benchmark steel prices HRC prices by region

200

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800

900

1,000

1,100

1,200

07.3 08.3 09.3 10.3 11.3 12.3 13.3 14.3 15.3

(US$/ton) Hot rolled coil, World Export Market

Hot rolled coil, World Export Market

200

400

600

800

1,000

1,200

1,400

07.3 08.3 09.3 10.3 11.3 12.3 13.3 14.3 15.3

(US$/ton) Hot rolled coil, World Export Market

USA East of Miss Hot rolled coil

Mainland China Hot rolled coil

China : HRC & CRC prices China : Rebar & Wire rod prices

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

07.1 08.1 09.1 10.1 11.1 12.1 13.1 14.1 15.1 16.1

(RMB/ton) CR Sheet 25mm Average

HR Sheet 25mm Average

1,000

2,000

3,000

4,000

5,000

6,000

7,000

07.1 08.1 09.1 10.1 11.1 12.1 13.1 14.1 15.1 16.1

(RMB/ton)Steel Rebar 25mm Average

Wire Rod 25mm Average



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Page 9

Key prices Most steel prices have dropped significantly in the last three months, but are now stabilising. The price gap between HR coils in US and China has expanded to c US$100/ton, indicating serious oversupply in the region.

Iron ore & coking coal prices

China import Iron Ore Fines Fe content

62% China import Iron

Ore Fines 58% China Import Indian

Iron Ore fob

Australia Export Iron Ore BHP (1Q11's

contract)

Brazil Export Iron Ore CVRD (1Q11's

contract) China Foundry Coke Domestic Spot price

1-wk % (0.5) (1.4) (1.4) N/A (2.3) (2.1) 1-month % 0.2 1.5 3.9 (14.2) 2.4 (2.1) 3-month % (19.5) (22.6) (16.4) (29.8) (19.2) (8.0) Ytd % (5.7) (4.6) (4.6) (42.4) (4.6) (2.1) Last price (US$/ton) 41 41 40 40 42 140

Scrap & semi- finished steel prices

Turkey import Heavy Melt Scrap #1&2

80:20 (CFR Turkish port) per metric

tonne

Iron & Steel Scrap China Domestic

Heavy Scrap Yuan/metric tonne

Steel Scrap No 1 heavy melting

China Domestic Heavy Scrap

(RMB/ton) East Asia Import Slab

(CFR) US East Asia Import Billet

(CFR)

1-wk % (4.8) 0.0 0.0 (4.8) 0.0 0.0 1-month % (4.3) 7.8 8.2 (4.3) 1.5 11.2 3-month % 3.4 (11.5) (5.0) 3.4 9.0 4.4 Ytd % (3.2) 7.8 33.1 (3.2) 1.5 11.2 Last price (US$/ton) 180.0 1,040.0 250 27 206 189

Benchmark Steel prices

Iron & Steel Steel Benchmarker Hot rolled coil World

Export Market $ per tonne

Iron & Steel Steel Benchmarker USA

East of Miss Hot rolled coil $ per

metric ton

Iron & Steel Steel Benchmarker USA East of Miss Cold

rolled coil $ per metric ton

Iron & Steel Benchmarker prices

Mainland China Rebar $ tonne

Benchmarker prices Mainland China Hot

rolled coil

Benchmarker prices Cold rolled coil

Mainland China

1-wk % 0.0 0.7 4.0 2.1 2.9 3.4 1-month % 2.5 1.9 7.1 (3.2) 5.5 8.0 3-month % (12.7) (13.3) (3.9) (6.9) (3.8) (1.8) Ytd % 0.0 0.7 4.0 2.1 2.9 3.4 Last price (US$/ton) 283 425 592 243 251 336

Benchmark Steel prices

China Domestic Steel Rebar 25 mm Spot

Average Price

China Domestic High Speed Wire Rod

6.5mm Spot Average Price

China Domestic Hot Rolled Steel Sheet

Spot Average Price

China Domestic Cold Rolled Steel Sheet

Spot Average Price

China Domestic Steel Plate 20mm Spot

Average Price 1-wk % (0.9) (0.7) (0.3) (0.6) (0.2) 1-month % 3.5 2.9 2.9 7.8 3.5 3-month % (5.5) (5.1) 4.3 10.8 (1.2) Ytd % 1.3 1.8 0.5 4.5 3.0 Last price (RMB/ton) 2,026 2,051 1,900 1,920 1,850 Last price(US$/ton) 308 312 289 292 281



Basic Materials

Page 10

Company Guide

ASIAN INSIGHTS VICKERS SECURITIES sa: YM

BUY Last Traded Price: KRW48,850 (KOSPI : 1,912.06) Price Target : KRW73,000 (49% upside) Potential Catalyst: (i) Regional and domestic steel prices’ recovery and sales volume growth; (ii) merger synergies will boost earnings from 2016 onwards, and (iv) undemanding valuations Where we differ: Our FY15F EPS is 13% lower than street consensus as we are more bearish on its business environment including steel prices. Analyst LEE Eun Young +65 6682 3708 [email protected]

Price Relative

Forecasts and Valuation FY Dec (KRW bn) 2014A 2015A 2016F 2017F Revenue 16,762 16,133 16,558 17,883 EBITDA 2,689 2,954 3,204 3,233 Pre-tax Profit 1,099 927 1,121 1,227 Net Profit 782 739 894 978 Net Pft (Pre Ex.) 782 739 894 978 EPS (KRW) 6,712 5,939 6,697 7,329 EPS Pre Ex. (KRW) 6,712 5,939 6,697 7,329 EPS Gth (%) (19) (12) 13 9 EPS Gth Pre Ex (%) (19) (12) 13 9 Diluted EPS (KRW) 6,712 5,939 6,697 7,329 Net DPS (KRW) 750 750 750 1,000 BV Per Share (KRW) 116,893 107,359 111,254 115,534 PE (X) 7.3 8.2 7.3 6.7 PE Pre Ex. (X) 7.3 8.2 7.3 6.7 P/Cash Flow (X) 2.9 2.6 2.8 3.1 EV/EBITDA (X) 5.7 5.4 4.9 4.6 Net Div Yield (%) 1.5 1.5 1.5 2.0 P/Book Value (X) 0.4 0.5 0.4 0.4 Net Debt/Equity (X) 0.7 0.7 0.6 0.5 ROAE (%) 5.8 5.3 6.1 6.5 Earnings Rev (%): 0 0 Consensus EPS (KRW): 5,376 5,401 6,980 Other Broker Recs: B: 32 S: 0 H: 4

Source of all data: Company, DBS Bank, Bloomberg Finance L.P

Last steel mill standing Negatives priced in. Its share prices have fallen 13% for the last 3 months due to: i) larger selling price cut of auto sheets in 4Q15, ii) earnings vacuum following the absence of internal trade with Hysco post merger, and iii) forex related losses as the company has US$2.9bn debt denominated in foreign currencies. However, we believe the negatives have been priced in, and there is limited price downside with the stock currently trading at 0.4x FY16F P/BV and 7.0x FY16F PE.

Most resilient earnings expected among peers, backed by sales volume growth and contribution of auto sheets. Despite tough market condition, it registered 2.5% sales volume growth driven by 13% growth of long steel products. The management guided for a 6.6% sales volume growth in FY16, driven by positive merger effect and commencement of operation in the new special steel plant. We expect overseas’ Steel Service Center (former Hysco) and Hyundai Special Steel will contribute its earnings in the full scale. We expect a 13% EPS growth in FY16 for Hyundai Steel.

Mergers to drive sustainable earnings growth. A series of mergers and acquisitions has taken place, and will give a boost to earnings : (a) Hysco, (b) Hyundai Special Steel (Dongbu Special Steel previously), (c) large-sized forged products segment (former SPP Yulchon Energy) and new plants (special steel bar plant / #2 CGL - Continuous Galvanizing Line). Despite concerns on slower outlook for Hyundai Motor Group, its global automobile shipment is expected to grow 3% in 2016 and OP margins of auto sheets would be sustainable at over 15% even after cutting selling prices. Its diversified sales portfolio (27% from long products, 55% flat products and 165% heavy industries and affiliates) will support earnings.

Valuation:

Our TP of KRW73,000 is pegged to 0.68x FY15F P/BV based on its historical average multiple for the last 2 years, which reflects expectations of low ROEs in FY15F/16F, similar to those achieved in FY13/FY14 under sluggish fundamentals. Our target P/BV represents a 25% discount to the regional peers’ average.

Key Risks to Our View:

Declining shipment of auto sheet products to the Hyundai Motor group due to sluggish automobile sales would be a key risk. A sharp contraction of steel demand and prices are key risks, which may take place if there is a hard landing in China.

At A Glance Issued Capital (m shrs) 133 Mkt. Cap (KRWbn/US$m) 6,519 / 5,396 Major Shareholders KIA Motors Corp (%) 21.4 Mong-Koo Chung (%) 12.6 Free Float (%) 47.2 3m Avg. Daily Val (US$m) 13.6 ICB Industry : Basic Materials / Industrial Metals & Mining


Regional Korea Company Guide

Hyundai Steel Co. Version 2 | Bloomberg: 004020 KS | Reuters: 004020.KS Refer to important disclosures at the end of this report

38

58

78

98

118

138

158

178

198

218

39,465.0

49,465.0

59,465.0

69,465.0

79,465.0

89,465.0

99,465.0

109,465.0

119,465.0

Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

Relative IndexKRW

Hyundai Steel Co. (LHS) Relative KOSPI INDEX (RHS)

ASIAN INSIGHTS VICKERS SECURITIES Page 12

Company Guide

Hyundai Steel Co.

Earnings Drivers:

Contrary to earlier expectations of earnings growth in FY15 after the merger with Hysco, Hyundai Steel’s EPS has declined by 12% following KRW100bn earnings vacuum from the absence of internal trade with Hysco post merger and forex related losses from US$2.9bn in foreign currency- denominated debt. In addition, the especially slow automobile shipment from Hyundai Motors Group in China has dampened investment sentiment. However, we believe Hyundai Steel’s earnings would grow progressively, benefitting from a series of merger and acquisitions that have taken place. Earnings recovery supported by long steel’s sales volume growth. The sales volume of rebars and H-beams has grown by 6% and 4% y-o-y respectively in 2015. We expect demand of long steel products will be resilient in 2016 as national construction investment is expected to grow 3.5%, backed by strong orderbooks and permitted areas for construction. This is driven by the housing construction boom as the property market is rebounding, thanks to real demand for residential homes, and not speculation. There are concerns on the slowdown in the property business cycle. However, we expect the company to maintain c. 6% OP margins in 2016, backed by low steel scrap prices and anti-dumping measure for imported steel products. The management guided for a 6.6% sales volume growth in FY16, driven by positive merger effect and commencement of operation in the new special steel plant. It plans to achieve a 1.8% growth of rebar and 28.4% growth of beam and bar products in 2016. Merger benefits with Hysco to be realized in near term. Hyundai Steel merged with Hysco’s CR sheet division after splitting Hysco to CR sheet division and other business in Dec 2013 and merged with the entire Hysco in July 2015. Hysco (overseas steel service centers/pipes/auto body parts divisions excluding CR sheet) had registered revenue of KRW4,214 bn and OP excluding one off gain of KRW2,952bn in 2014. Because of earnings vacuum following the elimination of c KRW100bn unrealised profit with Hysco post merger, merger impact was limited in 2015. However, we expect this segment to contribute revenue of c. KRW2tr and OP of KRW180bn in 2016. Hyundai Specialty Steel/#2 CGL/new specialty steel plant/forged business. Its affiliate, Hyundai Special Steel (50% stake acquired by Hyundai Steel in Feb 2015) registered KRW407bn, revenue, KRW20bn OP and KRW 5bn net profit in 2015. It will start commercial run of #2 CGL (capacity of 500k tons p.a) and new specialty steel plant (1m tons p.a) in Feb 2016. Hyundai Steel is likely to buy a large scale press from Hyundai Heavy Industry to strengthen its large-scale forged products operations (former SPP Yulchon Energy, acquired June 2015). These will be the new drivers for long-term earnings growth even though the new specialty steel plant is likely to post losses in 2016.

GDP growth rate

F/X(KRW/US$, end)

Sales volume

ASP of flat steel products

ASP of long steel products

Source: Company, DBS Bank

2.9

3.3

2.8

3.4

00.00

0.43

0.86

1.29

1.72

2.15

2.58

3.00

3.43

2013A 2014A 2015A 2016F 2017F

1,0551,099

1,176 1,150 1,150

0

200

400

600

800

1,000

2013A 2014A 2015A 2016F 2017F

16,416

19,445 20,06221,260 21,747

0

4,400

8,800

13,200

17,600

22,000

2013A 2014A 2015A 2016F 2017F

1,275

813770 785 802

0

200

400

600

800

1,000

1,200

2013A 2014A 2015A 2016F 2017F

762724 718 732 748

0

154

308

462

616

770

2013A 2014A 2015A 2016F 2017F


Company Guide

Hyundai Steel Co.

Big advantage from captive demand from Hyundai Motor group. Despite concerns on the negative impact from weaker outlook from Hyundai Motor Group, its global automobile shipment is expected to grow 3% in 2016, and reach 10m units eventually from 8m units currently. OP margins of auto sheets has been c. 20% historically and is estimated to be sustainable at over 15% despite cutting selling prices, and are superior to peers in the region. Diversified portfolio, a ground of stable earnings Its diversified sales portfolio (27% from long products, 55% flat products and 15% heavy industries and affiliates) will support its earnings. We expect 12.5% EPS CAGR during 2015~ 2017. In terms of profitability and earnings sustainability, Hyundai Steel is ranked above other regional players.

Balance Sheet:

Healthy financials, deleveraging on the way. Hyundai Steel’s gearing ratio fell from 0.88x in FY13 to 0.75x in FY14 and is expected to remain at a similar level due to various M&As. We expect the company’s gearing ratio to decline gradually to 0.57x in FY17F. While its asset turnover should improve as major capex would be completed by the end of FY15, with revenue from these investments flowing in from FY16 onwards. Also, its operating cash flow is estimated to improve significantly as its capex will decline to KRW1.2tn in FY16 from KRW2.2tn in FY15 following the completion of major investments.

Share Price Drivers:

Undemanding valuation, strong growth potential. Its share prices has plummeted c. 40% since Apr 2015? as regional steel prices have continued to decline and contribution from M&As has been muted, affected by one off losses and dilution effect. As a result, the stock is trading at undemanding PE valuation of 7.1x for 16F, which represents 0.4x P/BV. Although FY16F ROE is estimated to be 6.1%, which is lower than KOSPI average ROE of 8.8%, Hyundai Steel’s current share price is trading at a significant discount to its peers; the material sector in emerging markets is trading at 13x PE and 0.9x P/BV for FY16F. In addition, the stock is also trading below the low end of its historical trading band despite street expectations of an improvement in earnings. We believe its earnings growth potential is currently clouded by the weak business environment. Catalysts would come from improving economic indicators and rising steel prices in China. We forecast EPS growth of 13% in FY16F

Leverage & Asset Turnover (x)

Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.5

0.6

0.6

0.7

0.7

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

2013A 2014A 2015A 2016F 2017F

Gross Debt to Equity (LHS) Asset Turnover (RHS)

0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

2013A 2014A 2015A 2016F 2017F

Capital Expenditure (-)

KR

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

2013A 2014A 2015A 2016F 2017F

Avg: 10.5x

+1sd: 11.9x

+2sd: 13.3x

‐1sd: 9.1x

‐2sd: 7.7x

5.8

6.8

7.8

8.8

9.8

10.8

11.8

12.8

13.8


(x)

Avg: 0.66x

+1sd: 0.79x

+2sd: 0.92x

‐1sd: 0.54x

‐2sd: 0.41x

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2


(x)


Company Guide

Hyundai Steel Co.

Key Risks:

Weak shipment to captive market. The Hyundai Motor Group has been the biggest advantage for this counter as Hyundai Steel is able to secure strong and stable captive demand. Hence, negative automobile sales growth from Hyundai Motor Group is a key risk. Another risk is profit deterioration from the car makers in the group is likely to increase pressure on its selling prices, but we highlight that steel sheet for cars accounts for only c 5% of the total manufacturing cost of a car. Normalisation of new specialty steel bar plant. The first year of operation usually registers losses as it takes time to meet quality requirements and to reach full utilisation. We factored in a KRW20bn loss for this year on the new specialty steel bar plant. However, it could pose a risk to earnings if it fails to normalise its operations as quickly as planned. Imported Chinese steel products and anti-dumping from exporting countries. Chinese imported steel products have been a threat to Korea’s steel sector as Korea is the biggest export market for Chinese steel products. For H-beams, Hyundai Steel has succeeded in its anti-dumping lawsuit against imported H-beam products from China. As a result, Chinese H-beam imported products have been slapped with 28.2%~32.7% anti-dumping tariffs for the last 5 years. However, we believe that this measure may not apply to all products. On the other hand, potential anti-dumping lawsuit against its exported products to overseas market by the competitors is also a major risk as c. 28% of the sales volume is exported. Also, the sharp contraction of steel demand and falling prices are key risks, which may occur in the event of a hard landing in the Chinese economy.

Company Background

Hyundai Steel is the second-largest steel maker in Korea and is ranked the 14th largest mill globally with an annual capacity of 24 m tons. It was established as Korea’s first steel maker in 1953 and has grown to be the leading long steel makerin Korea. In 2004, it merged with Hanbo Steel and constructed an integrated steel mill in Oct 2006 in Dangjin, with a capacity of 12m tons p.a.of flat steel including 3 blast furnaces. Furthermore, it merged with the cold rolling division of Hyundai Hysco in December 2013 and the entire Hyundai Hysco in July 2015. As at end-June-15, it is the biggest long steel provider with 31% market share for rebars and 72% for H-beams. At the same time, it is a major manufacturer for flat products including auto sheet. Its market shares of CR sheets and HRC were 31% and 32% respectively in 1H15.


Company Guide

Hyundai Steel Co.

Key Assumptions

FY Dec 2013A 2014A 2015A 2016F 2017F GDP growth rate 2,900 3,300 2,800 3,400 0.00 F/X(KRW/US$, end) 1,055,400 1,099,300 1,175,900 1,150,000 1,150,000 Sales volume 16,416,000 19,445,000 20,062,168 21,259,711 21,747,499 ASP of flat steel products 1,275,089 812,920 770,435 784,818 801,935 ASP of long steel products 762,177 723,531 718,341 731,834 748,217 Segmental Breakdown

FY Dec 2013A 2014A 2015A 2016F 2017F Revenues (KRW bn) Flat steel products 11,412 9,929 9,272 9,577 9,934 Long steel products 4,838 4,483 4,606 4,980 5,294 Stainless 232 223 212 207 212 Heavy 1,348 1,398 967 919 937 Others (4,297) 730 1,076 876 1,505 Total 13,533 16,762 16,133 16,558 17,883 Sales volume(k ton ) Flat steel products 8,950 12,214 12,035 12,202 12,388 Long steel products 6,348 6,196 6,412 6,805 7,076 Stainless 81 82 84 84 84 Heavy Industries/pipes/others 1,037 953 1,532 2,169 2,200

Total 16,416 19,445 20,062 21,260 21,747 ASP(k KRW/ton) Flat steel products 127,508.9 81,292.0 77,043.5 78,481.8 80,193.5 Long steel products 76,217.7 72,353.1 71,834.1 73,183.4 74,821.7 Stainless 286,296.3 271,341.5 253,000.2 246,955.9 253,746.3 Heavy Industries/pipes/others 129,961.4 146,726.1 63,142.0 42,363.7 42,596.3

Total 82,436.4 86,204.0 80,412.6 77,882.6 82,232.1 Income Statement (KRW bn)

FY Dec 2013A 2014A 2015A 2016F 2017F Revenue 13,533 16,762 16,133 16,558 17,883 Cost of Goods Sold (12,184) (14,442) (13,702) (14,133) (15,300) Gross Profit 1,349 2,321 2,431 2,425 2,583 Other Opng (Exp)/Inc (586) (830) (967) (914) (984) Operating Profit 763 1,491 1,464 1,511 1,599 Other Non Opg (Exp)/Inc 223 (13) (141) (32) (42) Associates & JV Inc 7 12 10 20 20 Net Interest (Exp)/Inc (221) (402) (417) (389) (361) Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 782 1,099 927 1,121 1,227 Tax (73) (316) (188) (228) (249) Minority Interest 0 0 0 0 0 Preference Dividend 0 0 0 0 0 Net Profit 709 782 739 894 978 Net Profit before Except. 709 782 739 894 978 EBITDA 1,717 2,689 2,954 3,204 3,233 Growth Revenue Gth (%) (9.1) 23.9 (3.8) 2.6 8.0 EBITDA Gth (%) (13.0) 56.6 9.9 8.5 0.9 Opg Profit Gth (%) (14.2) 95.5 (1.8) 3.2 5.8 Net Profit Gth (%) (10.9) 10.3 (5.6) 21.0 9.4 Margins & Ratio Gross Margins (%) 10.0 13.8 15.1 14.6 14.4 Opg Profit Margin (%) 5.6 8.9 9.1 9.1 8.9 Net Profit Margin (%) 5.2 4.7 4.6 5.4 5.5 ROAE (%) 6.2 5.8 5.3 6.1 6.5 ROA (%) 2.7 2.7 2.5 3.0 3.3 ROCE (%) 3.1 4.2 4.6 4.6 5.0 Div Payout Ratio (%) 8.2 11.2 13.5 11.2 13.6 Net Interest Cover (x) 3.5 3.7 3.5 3.9 4.4


Expect c KRW50bn losses from new specialty steel plant, however, merger with Hysco will drive OP growth

Recent M&As and capex will boost revenue gradually.

Despite OP growth, pre-tax profit to decline slightly due to forex related losses


Company Guide

Hyundai Steel Co.

Quarterly / Interim Income Statement (KRWbn)

FY Dec 4Q2014 1Q2015 2Q2015 3Q2015 4Q2015F Revenue 4,248 3,751 3,994 4,083 4,305 Cost of Goods Sold (3,539) (3,193) (3,337) (3,495) (3,677) Gross Profit 709 557 657 588 628 Other Oper. (Exp)/Inc (223) (218) (224) (257) (268) Operating Profit 486 340 433 331 360 Other Non Opg (Exp)/Inc 0 17 0 3 (8) Associates & JV Inc 6 3 1 2 3 Net Interest (Exp)/Inc (95) (100) (91) (102) (124) Exceptional Gain/(Loss) 0 1 2 3 4 Pre-tax Profit 397 261 346 237 234 Tax 70 69 57 (15) 77 Minority Interest N/A N/A N/A N/A N/A Net Profit 216 243 201 26 268 Net profit bef Except. 467 329 401 219 307 EBITDA 786 667 740 731 958 Growth Revenue Gth (%) 6.0 (11.7) 6.5 2.2 5.4 EBITDA Gth (%) 15.3 (15.1) 10.9 (1.3) 31.0 Opg Profit Gth (%) 29.3 (30.1) 27.5 (23.6) 8.7 Net Profit Gth (%) 65.7 12.8 (17.3) (86.9) 914.0 Margins Gross Margins (%) 16.7 14.9 16.4 14.4 14.6 Opg Margins (%) 11.4 9.1 10.8 8.1 8.4 Net Profit Margins (%) 5.1 6.5 5.0 0.6 6.2 Balance Sheet (KRW bn)

FY Dec 2013A 2014A 2015A 2016F 2017F Net Fixed Assets 19,605 19,572 20,458 20,014 19,415 Invts in Associates & JVs 113 116 126 146 166 Other LT Assets 3,439 3,125 3,070 3,019 2,973 Cash & ST Invts 921 886 1,521 1,225 938 Inventory 3,200 2,954 2,843 2,918 3,152 Debtors 2,169 2,166 2,084 2,139 2,311 Other Current Assets 74 115 115 115 115 Total Assets 29,520 28,934 30,216 29,577 29,070 ST Debt 2,712 1,866 2,366 2,366 2,366 Creditor 2,334 1,982 1,719 1,554 1,469 Other Current Liab 1,451 2,037 2,175 2,175 2,175 LT Debt 8,999 8,554 8,754 7,754 6,754 Other LT Liabilities 661 680 680 680 680 Shareholder’s Equity 13,190 13,624 14,327 14,846 15,417 Minority Interests 175 191 196 202 209 Total Cap. & Liab. 29,520 28,934 30,216 29,577 29,070 Non-Cash Wkg. Capital 1,658 1,215 1,148 1,443 1,933 Net Cash/(Debt) (10,789) (9,534) (9,598) (8,894) (8,181) Debtors Turn (avg days) 58.6 47.2 48.1 46.6 45.4 Creditors Turn (avg days) 72.2 59.4 55.9 48.0 40.4 Inventory Turn (avg days) 89.9 84.7 87.5 84.5 81.1 Asset Turnover (x) 0.5 0.6 0.5 0.6 0.6 Current Ratio (x) 1.0 1.0 1.0 1.0 1.1 Quick Ratio (x) 0.5 0.5 0.6 0.6 0.5 Net Debt/Equity (X) 0.8 0.7 0.7 0.6 0.5 Net Debt/Equity ex MI (X) 0.8 0.7 0.7 0.6 0.5 Capex to Debt (%) 22.8 10.1 21.9 11.9 11.0 Z-Score (X) 1.2 1.5 1.5 1.7 1.9


Because of one-off loss in the process of removing internal trade with former Hysco, 3Q15’s OP is estimated decline y-o-y.


Company Guide

Hyundai Steel Co.

Cash Flow Statement (KRW bn)

FY Dec 2013A 2014A 2015A 2016F 2017F Pre-Tax Profit 782 1,099 927 1,121 1,227 Dep. & Amort. 714 1,189 1,610 1,694 1,645 Tax Paid (182) (540) (376) (228) (249) Assoc. & JV Inc/(loss) (7) (12) (10) (20) (20) Chg in Wkg.Cap. (460) (303) (54) (315) (585) Other Operating CF (204) 504 261 (74) (80) Net Operating CF 644 1,937 2,358 2,325 2,091 Capital Exp.(net) (2,674) (1,054) (2,440) (1,200) (1,000) Other Invts.(net) 86 311 0 0 0 Invts in Assoc. & JV 0 0 0 0 0 Div from Assoc & JV 0 0 0 0 0 Other Investing CF 642 (388) (440) (440) (440) Net Investing CF (1,947) (1,131) (2,880) (1,640) (1,440) Div Paid (42) (58) (87) (100) (100) Chg in Gross Debt 1,187 (817) 838 (1,000) (1,000) Capital Issues 0 0 338 0 0 Other Financing CF (1) 0 68 119 162 Net Financing CF 1,144 (876) 1,157 (981) (938) Currency Adjustments 0 0 0 0 0 Chg in Cash (159) (70) 635 (296) (287) Opg CFPS (KRW) 12,925 19,218 19,394 19,787 20,053 Free CFPS (KRW) (23,773) 7,574 (657) 8,431 8,173


Target Price & Ratings History

Source: DBS Bank

S.No. DateClos ing

PriceTarget Price

Rating

1: 30 Jan 15 65900 92000 BUY

2: 09 Apr 15 77500 92000 BUY

3: 27 Apr 15 76600 92000 BUY

4: 27 Jul 15 59500 87000 BUY

5: 02 Oct 15 51800 73000 BUY

6: 22 Oct 15 55300 73000 BUY

7: 31 Dec 15 49950 73000 BUY

Note : Share price and Target price are adjusted for corporate actions.

1

2

3

4

5

6

7

41657

46657

51657

56657

61657

66657

71657

76657

81657

Jan-15 May-15 Sep-15 Jan-16

KRW

ASIAN INSIGHTS VICKERS SECURITIES

ed-TH / sa- AL

BUY

Last Traded Price: RMB5.21 (CSI300 Index : 2,946) Price Target: RMB7.14 (37% upside) Potential Catalyst: Chinese steel capacity shutdown beats expectations in 2016 Where we differ: Our FY15/16/17F earnings are 32%/60%/23% below consensus as we are more bearish towards steel prices forecasts Analyst Addison DAI +852 2971 1931 [email protected] Price Relative

Forecasts and Valuation FY Dec (RMB m) 2014A 2015F 2016F 2017F Turnover 187,789 153,273 151,938 176,610 EBITDA 19,286 16,514 15,970 21,604 Pre-tax Profit 8,278 3,825 3,072 7,479 Net Profit 5,792 2,760 2,217 5,397 Net Pft (Pre Ex) 5,792 2,760 2,217 5,397 Net Profit Gth (Pre-ex) (%) (0.4) (52.3) (19.7) 143.5

EPS (RMB) 0.35 0.17 0.13 0.33 EPS Gth (%) 0.9 (52.3) (19.7) 143.5 Diluted EPS (RMB) 0.35 0.17 0.13 0.33 DPS (RMB) 0.18 0.09 0.07 0.17 BV Per Share (RMB) 6.94 7.02 7.01 7.17 PE (X) 14.8 31.1 38.7 15.9 P/Cash Flow (X) 3.0 4.2 5.6 5.0 P/Free CF (X) 13.9 nm 362.0 47.1 EV/EBITDA (X) 6.6 8.1 8.7 6.5 Net Div Yield (%) 3.5 1.6 1.3 3.2 P/Book Value (X) 0.8 0.7 0.7 0.7 Net Debt/Equity (X) 0.3 0.3 0.3 0.3 ROAE (%) 5.2 2.4 1.9 4.6 Earnings Rev (%): Nil Nil Nil Consensus EPS (RMB) 0.31 0.39 0.50 Other Broker Recs: B: 12 S: 0 H: 6

Source of all data: Company, DBSV, Thomson Reuters, HKEX

Still the best in class Industry outperformer. We lowered Baosteel’s TP to Rmb7.14 after trimming earnings forecasts. However, we maintain BUY as we believe the company’s optimised product mix (mainly manufacturing high-end consumer-related steel products) and strong financial position could facilitate the company’s market share gain amid an industry shakeout.

Earnings estimates revised down. We calculate 4Q-to-date Chinese steel spread (representing the differences between HRC and raw material costs) had declined to US$106/t vs US$115/t in 3Q15. Despite being the most advanced steel producer with optimised product mix in China, Baosteel’s steel prices are not immune to the industry’s ASP decline. We project the company’s 4Q15 unit GP to fall to Rmb270/t vs Rmb497/t in 3Q15. We have lowered steel GP forecast to Rmb488/t from Rmb537/t previously. We have also slashed FY16 steel GP forecast to Rmb356/t vs Rmb587/t previously. Our FY16F steel ASP forecast is Rmb3,223/t approximating current spot steel rates, assuming a decline rate of 14.7% from FY15’s Rmb3,777/t. Taking into account the above adjustments, we cut FY15/16 earnings by 33%/63% to Rmb2,760mn and Rmb1,954mn respectively.

Zhanjiang project and e-commence business. The #1 blast furnace with 4mt.p.a. crude steel started operation in Oct-2015. We foresee the inauguration of crude capacity to feed a commercial production of flat-steel by 3.5mt/7mt per annum in FY16 and FY17 respectively.The performance of ‘Ouyeel’ – the steel e-commerce platform for 9M15 was on track. In 9M15, Ouyeel’s (steel e-commerce) sales volume expanded by 63% to 5.11mt vs 2.91mt in 1H15. 9M15 sales revenue of Ouyeel was Rmb12.7bn, accounting for 10% of the company’s total sales revenue. We have cut FY15/16 sales volume forecast of steel e-commerce to 8mt/12mt from 10mt/20mt previously. We have revised down steel e-commerce L-T sales volume to 27mt.p.a. by 2018 vs 51mt.p.a previously.

Valuation:

Our TP is Rmb7.14. Our new TP is pegged at 1.0x FY16F P/BV. We set our target market cap at Rmb118bn based on i) market cap of Rmb99.3bn (Rmb6.03/sh) for steel business, pegged to an unchanged 0.78x FY16F P/BV, and ii) a market cap of Rmb18.3bn (Rmb1.11/sh) for e-commerce, pegged at 0.52x FY16F P/Sales vs 1.7x previously. Key Risks to Our View:

Key downside risks are: i) flat-steel price hovers at the bottom for a longer term, and ii) Zhenjiang’s steel capacity utilisation rate falling below expectations.

At A Glance Issued Capital (m shrs) 16,468 Mkt. Cap (RMBm/US$m) 85,796 / 13,048

Major Shareholders Baosteel Group (%) 79.7

Free Float (%) 20.3 3m Avg. Daily Val. (US$m) 65.3 ICB Industry : Basic Materials / Industrial Metals

63

83

103

123

143

163

183

203

3.2

4.2

5.2

6.2

7.2

8.2

9.2

10.2


Relative IndexRMB

Baoshan Iron & Steel Co-A (LHS) Relative SHSZ300 Index (RHS)


China / Hong Kong Company Guide

Baoshan Iron & Steel Co-A Edition 1 Version 1 |Bloomberg: 600019 CH Equity | Reuters: 600019.SS

Refer to important disclosures at the end of this report


Page 19

Company Guide


CRITICAL DATA POINTS TO WATCH

Earnings Drivers:

Chinese steel supply and demand dynamics. Chinese finished steel apparent consumption declined 1.6% y-o-y to 853mt. This is comprised a 0.6% y-o-y increase in finished steel output to 935mt and a 32% y-o-y rise in net exports to 82mt. On the demand side, 40%/17%/16%/8%/2% are attributable to property, infrastructure construction, machinery, auto and home appliance respectively. In 10M15, China’s property floor space new starts declined 13.9% y-o-y when floor space under construction merely ticked up 2.3% y-o-y. Over Jan-Oct 2015, road and railway fixed asset investment inched up 7% and 0.7% y-o-y respectively. During the same period, we estimate China’s machinery output had declined by 8% and auto output was flattish y-o-y at 19.3mn units. We forecast Chinese finished steel consumption to have peaked out and to decrease 4.8% to 668mt in FY15 and to further contract by 3% to 648mt in FY16. Chinese crude steel output edged down 1.3% to 673mt in 10M15. We expect FY15 crude steel output to decline 2.1% y-o-y to 806mt. We estimate China’s crude steel utilisation for FY15 at 73% based on crude steel capacity of 1,100mt, down 4ppt y-o-y. We project FY16 crude steel output utilisation rate to further slip to 70% based on crude steel output of 781mt and crude capacity of 1,113mt. Flat-steel prices and sales volume. Baosteel is the largest pure flat-steel producer in China, primarily engaged in the manufacturing of CRC, HRC, heavy plates, pipe steel products. The company has around 50% market share in auto sheets and c.27% market share in the home appliance steel sector. Around 98% of the company’s sales volume is exposed to consumer-related steel or flat-steel. We forecast the company’s ASP in FY15/16 to fall by 16.9%/14.5% to Rmb3,777/t and Rmb3,219/t respectively. Our FY16F steel ASP assumes no upside to current domestic steel prices. We estimate every Rmb10/t change in steel ASP will swing FY16 EBITDA by 2.7% or Rmb426mn. We estimate that every 1% change in steel sales volume will swing FY16 EBITDA by 1% or Rmb157mn. Production cost. Iron ore, coking coal, scrap and depreciation accounts for 21%, 13%, 9%, 12% of the company’s production cost respectively. We estimate every Rmb10/t change in production cost will swing FY16 EBITDA by 2.9% or Rmb467mn.

Sales volume (Mt)

ASP (Rmb/t)

Unit production cost (Rmb/t)

Source: Company, DBS Vickers

22 21.8 21.5

25

28.5

0.0

3.6

7.2

10.8

14.4

18.0

21.6

25.2

28.8

2013A 2014A 2015F 2016F 2017F

4,7304,543

3,777

3,219 3,228

0

1,000

2,000

3,000

4,000

2013A 2014A 2015F 2016F 2017F

4,1714,003

3,288

2,861 2,861

0

900

1,800

2,700

3,600

2013A 2014A 2015F 2016F 2017F


Page 20

Company Guide


Balance Sheet:

The strongest financially. We deem Baosteel has the strongest balance sheet in the Chinese steel universe. Our FY15/16F Op-CF is Rmb20.2bn and Rmb15bn versus capex of Rmb23bn and Rmb15bn respectively. We forecast FY15/16 net gearing to edge up to 33% and 37% respectively vs 28% in FY14 due to decline in earnings. However, we think its financial position is still healthy compared to peers’ stretched balance sheets on negative cash flows. Share Price Drivers:

Steel output capacity shutdown beats expectations. As negative extends to the balance sheet for many Chinese steel participants, we expect stronger-than-expected output capacity cut to trigger a contemporary re-rating. We foresee a production capacity cut of 140mt or 12% in FY16 to help revive China’s steel prices as the production capacity utilisation recovers to 80%.

Key Risks:

Key downside risks are: i) flat-steel price hovering at the bottom for a longer term, ii) Zhenjiang’s steel capacity utilisation rate falling below expectations, and iii) intensifying competition within steel e-commerce.

Company Background

Steel business. Headquartered in Shanghai, Baosteel is the largest flat-steel producer in China with 24mt.p.a. of crude steel output capacity and 22mt.p.a. of finished steel capacity as at end-2014. In 2000, the company was listed on the Shanghai Stock Exchange. In China, Baosteel has a 50% market share in high-end automotive steel (mainly CRC and galvanised steel), 27% market share in home appliance steel, 47% market share in high-end oriental silicon steel and 26% market share in non-standard oil pipes. It was listed on the Shanghai Stock Exchange in 2000. E-commerce business. In 2013, Baosteel strategically developed its steel e-commerce business by initiating the Shanghai Steel Trading Center. In 2014, Baosteel’s internet steel sales volume exceeded 4.5mt, representing a 125% y-o-y growth. This accounted for 10% of the company’s sales revenue.

Leverage & Asset Turnover (x)

Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)

Source: Company, DBS Vickers

0.6

0.7

0.7

0.8

0.8

0.9

0.9

0.00

0.10

0.20

0.30

0.40

0.50

2013A 2014A 2015F 2016F 2017F

Gross Debt to Equity (LHS) Asset Turnover (RHS)

0.0

5,000.0

10,000.0

15,000.0

20,000.0

25,000.0

30,000.0

2013A 2014A 2015F 2016F 2017F

Capital Expenditure (-)

RMB

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

2013A 2014A 2015F 2016F 2017F

Avg: 22.3x

+1sd: 37.3x

+2sd: 52.3x

‐1sd: 7.2x

-7.0

3.0

13.0

23.0

33.0

43.0

53.0

63.0

Jan-12 Jan-13 Jan-14 Jan-15

(x)

Avg: 0.77x

+1sd: 0.94x

+2sd: 1.11x

‐1sd: 0.6x

‐2sd: 0.42x

0.3

0.5

0.7

0.9

1.1

1.3

1.5

Jan-12 Jan-13 Jan-14 Jan-15

(x)


Page 21

Company Guide


Key Assumptions

FY Dec 2013A 2014A 2015F 2016F 2017F Sales volume (Mt) 22.0 21.8 21.5 25.0 28.5 ASP (Rmb/t) 4,730.5 4,543.1 3,776.5 3,219.1 3,227.7 Unit production cost (Rmb/t) 4,171.1 4,002.9 3,288.4 2,860.8 2,860.8

Segmental Breakdown (RMB m)

FY Dec 2013A 2014A 2015F 2016F 2017F Revenues (RMB m) Steel 128,274 120,608 97,400 96,552 112,230 Trade (Processing & Distribution)

178,707 163,105 133,126 131,967 153,396

Others 18,543 28,935 24,657 24,442 40,979 Internal elimination (135,498) (124,859) (101,910) (101,022) (129,995) Total 190,026 187,789 153,273 151,938 176,610 Source: Company, DBS Vickers

Income Statement (RMB m) FY Dec 2013A 2014A 2015F 2016F 2017F Revenue 190,026 187,789 153,273 151,938 176,610 Cost of Goods Sold (172,366) (169,659) (138,535) (140,158) (159,119)

Gross Profit 17,660 18,130 14,738 11,780 17,492

Other Opng (Exp)/Inc (8,844) (9,929) (8,104) (8,033) (9,338)

Operating Profit 8,816 8,201 6,634 3,747 8,154

Other Non Opg (Exp)/Inc (1,350) 564 (544) 225 225

Associates & JV Inc 0 0 0 0 0

Net Interest (Exp)/Inc 544 (488) (2,265) (900) (900)

Dividend Income 0 0 0 0 0

Exceptional Gain/(Loss) 0 0 0 0 0

Pre-tax Profit 8,010 8,278 3,825 3,072 7,479

Tax (1,969) (2,187) (961) (772) (1,879)

Minority Interest (222) (298) (104) (83) (203)

Preference Dividend 0 0 0 0 0

Net Profit 5,818 5,792 2,760 2,217 5,397

Net Profit before Except. 5,818 5,792 2,760 2,217 5,397

EBITDA 17,782 19,286 16,514 15,970 21,604

Growth

Revenue Gth (%) (0.8) (1.2) (18.4) (0.9) 16.2

EBITDA Gth (%) (28.1) 8.5 (14.4) (3.3) 35.3

Opg Profit Gth (%) 88.4 (7.0) (19.1) (43.5) 117.6

Net Profit Gth (%) (42.3) (0.4) (52.3) (19.7) 143.5

Margins & Ratio

Gross Margins (%) 9.3 9.7 9.6 7.8 9.9

Opg Profit Margin (%) 4.6 4.4 4.3 2.5 4.6

Net Profit Margin (%) 3.1 3.1 1.8 1.5 3.1

ROAE (%) 5.3 5.2 2.4 1.9 4.6

ROA (%) 2.6 2.5 1.2 1.0 2.3

ROCE (%) 4.0 3.6 2.8 1.5 3.2 Div Payout Ratio (%) 28.3 51.2 51.2 51.2 51.2 Net Interest Cover (x) NM 16.8 2.9 4.2 9.1 Source: Company, DBS Vickers


Page 22

Company Guide


Interim Income Statement (RMB m)

FY Dec 1H2013 2H2013 1H2014 2H2014 1H2015 Revenue 96,259 93,767 97,793 89,996 80,944 Cost of Goods Sold (87,639) (84,727) (88,618) (81,042) (71,942) Gross Profit 8,621 9,039 9,175 8,955 9,002 Other Oper. (Exp)/Inc (3,778) (5,066) (4,418) (5,511) (4,466) Operating Profit 4,843 3,973 4,757 3,444 4,536 Other Non Opg (Exp)/Inc 84 (1,435) 260 304 871

Associates & JV Inc 0 0 0 0 0

Net Interest (Exp)/Inc 251 293 (546) 58 (444) Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 5,178 2,832 4,471 3,806 4,963 Tax (1,364) (605) (1,146) (1,041) (1,105) Minority Interest (111) (111) (172) (127) (119) Net Profit 3,703 2,116 3,154 2,638 3,739 Net profit bef Except. 3,703 2,116 3,154 2,638 3,739 Growth Revenue Gth (%) (1.9) 0.4 1.6 (4.0) (17.2) Opg Profit Gth (%) 72.7 111.9 (1.8) (13.3) (4.6) Net Profit Gth (%) (61.5) 341.1 (14.8) 24.7 18.5 Margins

Gross Margins (%) 9.0 9.6 9.4 10.0 11.1 Opg Profit Margins (%) 5.0 4.2 4.9 3.8 5.6 Net Profit Margins (%) 3.8 2.3 3.2 2.9 4.6 Source: Company, DBS Vickers

Balance Sheet (RMB m)

FY Dec 2013A 2014A 2015F 2016F 2017F Net Fixed Assets 101,392 109,656 125,387 133,114 140,161 Invts in Associates & JVs 0 0 0 0 0 Other LT Assets 47,220 44,611 39,566 35,476 35,864 Cash & ST Invts 12,881 12,104 12,829 15,027 18,209 Inventory 31,087 26,815 21,896 22,152 25,149 Debtors 23,422 19,271 15,729 15,592 18,124 Other Current Assets 10,666 16,196 11,051 9,683 6,698

Total Assets 226,668 228,653 226,458 231,045 244,205 ST Debt

34,471 31,480 31,480 31,480 31,480 Creditors 20,605 25,327 20,681 20,923 23,754 Other Current Liab 39,558 32,447 26,911 25,268 27,910 LT Debt 8,205 12,961 19,911 25,861 30,811 Other LT Liabilities 3,763 2,233 1,870 1,870 1,870 Shareholder’s Equity 110,512 114,258 115,555 115,509 118,045 Minority Interests 9,554 9,947 10,051 10,134 10,337 Total Cap. & Liab. 226,668 228,653 226,458 231,045 244,205 Non-Cash Wkg. Capital 5,012 4,508 1,084 1,236 (1,692) Net Cash/(Debt) (29,795) (32,337) (38,561) (42,313) (44,081) Debtors Turn (avg days) 42.6 41.5 41.7 37.6 34.8 Creditors Turn (avg days) 48.2 52.7 65.5 59.2 55.9 Inventory Turn (avg days) 67.5 66.4 69.4 62.7 59.2 Asset Turnover (x) 0.8 0.8 0.7 0.7 0.7 Current Ratio (x) 0.8 0.8 0.8 0.8 0.8 Quick Ratio (x) 0.4 0.4 0.4 0.4 0.4 Net Debt/Equity (X) 0.2 0.3 0.3 0.3 0.3 Net Debt/Equity ex MI (X) 0.3 0.3 0.3 0.4 0.4 Capex to Debt (%) 32.7 48.6 48.1 26.2 24.1 Z-Score (X) NA NA NA NA NA Source: Company, DBS Vickers


Page 23

Company Guide


Cash Flow Statement (RMB m)

FY Dec 2013A 2014A 2015F 2016F 2017F Pre-Tax Profit 8,010 8,278 3,825 3,072 7,479 Dep. & Amort. 10,316 10,521 10,424 11,998 13,224 Tax Paid (1,969) (2,187) (961) (772) (1,879) Assoc. & JV Inc/(loss) 0 0 0 0 0 (Pft)/ Loss on disposal of FAs 112 (46) 100 100 100 Chg in Wkg.Cap. (5,463) 11,198 3,895 203 (2,618) Other Operating CF 1,085 517 2,958 825 825

Net Operating CF 12,090 28,280 20,241 15,425 17,131 Capital Exp.(net) (13,958) (21,609) (24,700) (15,000) (15,000) Other Invts.(net) 5,914 5,744 5,292 0 0 Invts in Assoc. & JV 0 0 0 0 0 Div from Assoc & JV 0 0 0 0 0 Other Investing CF (673) (3,099) 30 30 30 Net Investing CF (8,717) (18,964) (19,378) (14,970) (14,970) Div Paid (3,659) (3,358) (2,965) (1,413) (1,135) Chg in Gross Debt 7,177 (6,387) 3,926 2,926 1,926 Capital Issues (3,083) (188) 0 0 0 Other Financing CF 165 399 320 320 320 Net Financing CF 599 (9,534) 1,281 1,833 1,111 Currency Adjustments 0 0 0 0 0 Chg in Cash 3,973 (217) 2,144 2,288 3,272 Opg CFPS (RMB) 1.05 1.04 0.99 0.92 1.20 Free CFPS (RMB) (0.15) 0.37 (0.23) 0.01 0.11 Source: Company, DBS Vickers

Target Price & Ratings History

Source: DBS Vickers

1 2 3 4 5 6

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Jan-

15

Mar

-15

Jun-

15

Aug

-15

Oct

-15

Jan-

16

RMBS.No. Date Closing T arget Rat ing

Price Price1: 11-Mar-15 RMB6.31 RMB9.00 Buy2: 30-Mar-15 RMB7.27 RMB9.00 Buy3: 27-Apr-15 RMB8.41 RMB10.20 Buy4: 4-Jun-15 RMB8.97 RMB10.50 Buy5: 26-Aug-15 RMB5.50 RMB9.09 Buy6: 16-Dec-15 RMB5.45 RMB7.14 Buy


Basic Materials

Page 24

DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:

STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)

BUY (>15% total return over the next 12 months for small caps, >10% for large caps)

HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)

FULLY VALUED (negative total return i.e. > -10% over the next 12 months)

SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends

GENERAL DISCLOSURE/DISCLAIMER

This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd and DBS Vickers Securities (Singapore) Pte

Ltd, its respective connected and associated corporations and affiliates (collectively, the “DBS Vickers Group”) only and no part of this document

may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS Bank Ltd..

The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS

Bank Ltd., its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively,

the “DBS Group”)) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to

change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard

to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of

addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal

or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of

profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This

document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or

persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group may have

positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and

other banking services for these companies.

Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can

be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments.

The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it

may not contain all material information concerning the company (or companies) referred to in this report.

The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and

assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on

which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual

results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED

UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that:

(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and

(b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk

assessments stated therein.

Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies)

mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the

commodity referred to in this report.

DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or research

department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction

in the past twelve months and does not engage in market-making.


Basic Materials

Page 25

ANALYST CERTIFICATION

The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the

companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her

compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of 1 Feb 2016, the

analyst(s) and his/her spouse and/or relatives who are financially dependent on the analyst(s), do not hold interests in the securities recommended

in this report (“interest” includes direct or indirect ownership of securities).

COMPANY-SPECIFIC / REGULATORY DISCLOSURES

1. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates have a proprietary position in

Baoshan Iron & Steel Co-A recommended in this report as of 31 Dec 2015

2. DBS Bank Ltd does not market make in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.

3. Compensation for investment banking services:

DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a

manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further

information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document

should contact DBSVUSA exclusively.

RESTRICTIONS ON DISTRIBUTION

General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

Australia This report is being distributed in Australia by DBS Bank Ltd. (“DBS”) or DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), both of which are exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 2001 (“CA”) in respect of financial services provided to the recipients. Both DBS and DBSVS are regulated by the Monetary Authority of Singapore under the laws of Singapore, which differ from Australian laws. Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.

Hong Kong This report is being distributed in Hong Kong by DBS Vickers (Hong Kong) Limited which is licensed and regulated by the Hong Kong Securities and Futures Commission.

Indonesia This report is being distributed in Indonesia by PT DBS Vickers Securities Indonesia.

Malaysia This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received from ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies.

Wong Ming Tek, Executive Director, ADBSR

Singapore This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBSVS (Company Regn No. 198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from, or in connection with the report.

Thailand This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd. Research reports distributed are only intended for institutional clients only and no other person may act upon it.


Basic Materials

Page 26

United Kingdom This report is being distributed in the UK by DBS Vickers Securities (UK) Ltd, who is an authorised person in the meaning of the Financial Services and Markets Act and is regulated by The Financial Conduct Authority. Research distributed in the UK is intended only for institutional clients.

Dubai

This research report is being distributed in The Dubai International Financial Centre (“DIFC”) by DBS Bank Ltd., (DIFC Branch) having its office at PO Box 506538, 3rd Floor, Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. DBS Bank Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for professional clients (as defined in the DFSA rulebook) and no other person may act upon it.

United States This report was prepared by DBS Bank Ltd.. DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate.

Other jurisdictions In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.

DBS Bank Ltd. 12 Marina Boulevard, Marina Bay Financial Centre Tower 3

Singapore 018982 Tel. 65-6878 8888

Company Regn. No. 196800306E

Documents

Basic Materials 29-Jan-2016 REG FN edited2...Regional Industry Focus Basic Materials Page 3 China: Net export -40-20 0 20 40 60 80 100 120 140 1996 1998 2000 2002 2004 2006 2008 2010