Event:
The company released its Q3 2008 report: in Q3 2008, it realized operating revenue of Rmb30.057bn (+42.59% yoy), net profit of Rmb260mn (-33.71% yoy) and EPS of Rmb0.229. Besides, Q1-Q3 EPS stood at Rmb1.86.
Our analysis and estimation:
Historic income in the first half is mainly owing to 1) gross profit margin boost due to price hikes; 2) period expenses decline and 3) statement combination of Minmetals Yingkou Medium Plate Co., Ltd. However, sharp decline of steel and raw materials of metallurgy in Q3 2008 produces significant negative influence on the company. We believe steel industry will set free its potential risks in Q3 2008; as a result, status analysis on Q3 2008 will help estimate operational risks in the future.
In Q3 2008, average price of steel and iron ore fell by 11.32% and 33.54% respectively, which was great strike for the company’s trading business and metallurgy industry. Composite gross profit margin was down to 5.57% from 6.99% in interim term; meantime, period expenses ratio surged from 1.37% to 2.08%. In October, steel market experienced sharper fall, and average decline of steel and iron ore reached 25%. Consequently, gross profit margin will continue falling; we forecast annual gross profit margin will be maintained at 5.40-5.50%, of which 2.35% for steel trading and 6.73% in raw material trading of metallurgy.
We notice that receivable accounts increase by 72.73% yoy; this is mainly due to open accounts to end-customers, which shows dismal of down-stream distribution. Inventory increases by 58.59%, with its value up Rmb2.01bn than that of interim term. Management team has realized potential risks in the first half, but the market changes faster. Under the current market status, the company is facing great inventory impairment risk. The company has provisioned Rmb326mn for asset impairment loss.
Steel industry being in loss, we believe steel price is unlikely to continue down trend in 2009. Low steel price will definitely induce cheap raw material, thus maintain gross profit margin of medium plates at 8-9%; however, this will greatly shave the profit. We forecast trading gross profit margin will continue to fall in 2009, with gross profit margin of steel and metallurgy raw material down to 1.60% and 5.00% respectively.
Investment suggestion:
Due to changes within the steel market, especially industrial decline in October, we adjust 2008 EPS to Rmb2.06 from Rmb2.45 and 2009 EPS from Rmb1.43 to Rmb1.29. Since performance risks are gradually releasing, we maintain “Cautious” rating for the counter.