Excerpts:

Event:

Baoshan Iron & Steel released price adjustment on iron and steel futures of Nov on Sep 19. It sharply shaved product prices of main products based on piece of Oct, of which, hot-rolled, cold-rolled and acid cleaning planks fell Rmb800/ton, electrolytic zinc steel declined Rmb900/ton, hot electrolytic zinc steel shrank Rmb700/ton, some electrical steel of B35 series went down Rmb300/ton and rest products decreased Rmb800/ton.

At present, price margin of hot-rolled products exceeded Rmb1200/ton, while cold-rolled steel reached nearly Rmb1200/ton; we believe price cut was mainly caused by high price margin.

Our analysis and estimation:

08 EPS decreased from Rmb1.1/share to Rmb1.04/share.

1) Earning forecast of Q3

Firstly, product price slightly increased. According to our forecast, operating revenue of Q3 will advance 2.3% qoq, an increase of 15.5% yoy.

Secondly, due to price hikes of iron ore and coal, cost of Q3 will increase ~Rmb3.3bn than that of Q2, translating into price appreciation of Rmb510/ton of steel.

Thirdly, sales expense, administrative expense and financial expense will not largely fluctuate during period under view and we forecast EPS Jul-Sep at Rmb0.249, while EPS Jan-Sep to be Rmb0.8.

2) Earning forecast of Q4

Price of Q4 slightly adjusted, hot-rolled acid cleaning steel and universal cold-rolled steel decreased Rmb300/ton, hot electrolytic zinc steel fell Rmb100/ton, wide-thick plank appreciated Rmb100/ton, of which ship plank and boiler container plank went up Rmb400/ton and Rmb500/ton respectively. We forecast income of Oct-Nov will decline ~Rmb2.5bn and cost is likely to drop than that of Q3, with EPS Oct-Nov to be Rmb0.24 and 2008 EPS of Rmb1.04.

Earnings forecast and rating: