MA Steel: The beneficiary industry is weak to stay strong

State-HO Capital due to market overcapacity is still grim, China's Ministry of Industry issued a restraining order on the steel sector, and the industry participants are required to strictly implement the elimination of backward production capacity measures.　　At the same time, the Ministry also asked the commercial banks to stop lending to re-opened and expand the production of steel enterprises. On the other hand, the government also plans to further clarify the list of enterprises and equipment for the elimination of backward production capacity and will be accountable to local governments that have not closed the relevant capacity. These measures are obviously more stringent and more severe than in the past. The bank believes that the Ministry of Industry has taken more stringent actions against the steel sector, mainly because of the slow progress in the production of Chinese steel mills. The newly released figures show that the mainland's crude steel production in April and 52.91 million tonnes respectively amounted to a decrease of 3.9% and 2.6% over a year earlier.　　As the price of steel in the mainland began to rebound at the end of April, the central government is concerned that small and medium-sized steel mills with a keen response to market changes and no market conduct will take advantage of the revival and further unbalance the market supply and demand. The bank believes that China's efforts to eliminate backward production capacity is beneficial to Maanshan steel (0323), because most of the backward production capacity is the main production of long and hot-rolled steel, and the two kinds of steel accounted for more than 60% of the steel production capacity of MA steel.　　Because these backward small and medium-sized steel mills are mostly from the spot market to buy raw materials, and the spot price of raw materials is lower than Chang, MA steel relative to such small and medium-sized steel mills have a certain cost advantage. Improvements in profitability in the second half of the year benefited from the start of the infrastructure projects, and the price of long materials has rebounded slowly since the end of April. The bank had previously worried that if any significant rebound in the prices of long materials would enable the small and medium steel mills to resume their works quickly, the prices of long materials would again be under pressure.　　However, China's stringent action to reduce the production and the elimination of backward capacity will improve the future of long-term materials, and make the profitability of MA Steel in the second half of 09 and 2010 improved. The bank maintained a 09-year profit forecast of Ma steel at 645 million yuan (earnings per share of 0.08 yuan), equivalent to a 17% per cent decline in earnings for each share.　　At the same time, the bank believed that as China's real Estate Developers Association restarted its development projects, the average price of Masteel's long materials would rebound significantly in 2010, thus estimating that the company's 2010-year earnings would return to 2.25 billion yuan (0.29 yuan per share). As expected earnings will be improved in the second half of 09 and 2010, the bank will raise the MA steel rating to buy, 12-month target price of 4.50 yuan, equivalent to 1 times times 2010 years of the market rate.