7 Things To Know About Baoshan Iron & Steel Co Ltd

1. Stock Information

TICKER SYMBOL: SHSE: 600019 / SHA:600019

MARKET CAP: RMB 142.6 billion (June 2017)

INDUSTRY: Basic Materials

2. Business Overview

Baoshan Iron & Steel Co. Ltd (SHA:600019) ([stock_quote symbol=”SHA:600019″ show=”name” nolink=”1″ class=”1″])  is the largest steel maker in China and the second-largest in the world after ArcelorMittal (NYSE:MT) ([stock_quote symbol=”NYSE:MT” show=”name” nolink=”1″ class=”1″]) . Baoshan Iron & Steel is listed on the Shanghai Stock Exchange. Its headquarters are located in the Baoshan district of Shanghai, with major production bases in Baoshan (Shanghai), Meishan (Nanjing), and Zhanjiang (Guangdong). It also recently merged with Wuhan Iron & Steel. Baosteel’s major products are cold-rolled (CR) steel sheets (comprising 49.7% of FY16 sales), hot-rolled (HR) steel sheets (33.1%), steel pipes and tubes (7.3%), and others (9.9%).

Baosteel mainly focuses on hot-rolled and cold-rolled flat products, aiming at the high end. It has more than 60% market share in cold-rolled auto sheets in China, and over 80% market share in silicon steel. It is also a leader in home appliances sheet, shipbuilding plate, and OCTG products.

Revenues grew 13% to reach RMB 185.7bn. Operating profits grew 158% to reach RMB 14.8bn. Net income grew 849% to reach RMB 8.97bn.

Main competitors include Angang Steel Company ([stock_quote symbol=”HKG:0347″ show=”name” nolink=”1″ class=”1″])  (RMB 30bn market cap), Maanshan Iron & Steel ([stock_quote symbol=”HKG:0323″ show=”name” nolink=”1″ class=”1″]) (RMB 24.5bn market cap).

3. Key Strengths

Focus on high-end products

Baosteel is known for its dominant market shares for cold-rolled auto sheet and high-end silicon electrical steel in China. The company’s strong product quality at the high-end market has generated higher ASP and profit margin than its peers.

Economies of scale

After last year’s merger with Wuhan Iron & Steel, Baosteel is now the second largest steel maker in the world after ArcelorMittal. In China the company has over 60% market share in auto sheets and over 80% market share in silicon steel. The merger allows the combined entity to integrate raw materials procurement, logistics, efficiency improvement, and sales network sharing, resulting in over RMB 1 bn in cost savings.

4. Key Opportunities

Industry consolidation and capacity cuts

The Chinese government is in the midst of a three-year plan to close down unprofitable steel mills as oversupply has caused steel prices to decline rapidly. Last year the government reduced the capacity of its state-owned steel mills by 45 million tonnes; its long-term plan is to reduce total capacity by 150 million tonnes. Larger players such as Baoshan Iron & Steel are likely to benefit as prices rise and the industry recovers.  Last year Baosteel merged with Wuhan Iron & Steel to become the world’s second-largest steel maker, next to ArcelorMittal.

Cost-cutting measures

The company is in the process of instituting a three-year cost-cutting campaign, with a target of cutting RMB 17 bn for 2016-18. This will make operations more efficient and lift margins. In 2016 the company successfully cut RMB 6 bn in expenses.

5. Key Risks

Heavy reliance on auto sector demand

The company’s steel products are primarily sold to automakers in China. In fact, the auto industry accounts for a majority of the company’s sales, whereas the home appliance industry accounts for just 5%. Thus, a downturn in the auto industry could severely impact Baosteel.

Declining demand

Overall demand for steel products will continue to decline in 2017 by 2-3%, primarily due to a decline in the property industry. While the industry will benefit from capacity reductions of 7% overall, long-term steel demand could continue to fall if underlying demand does not recover. On the bright side, demand from the auto, home appliances, and machinery sectors remains strong.

6. Valuation

Baosteel currently trades at a trailing P/E ratio of 10.4x, compared to peers Angang Steel and Maanshan Iron & Steel, which trade at 11.8x and 10.5x earnings respectively. On a book value basis, it trades at 0.88x book value, whereas Angang Steel and Maanshan Iron & Steel trade at 0.87x and 1.32x book value respectively.

7. Shareholding Structure

State-owned Baosteel Group owns 52.1%, while Wuhan Iron & Steel owns 13.5%. Baosteel merged with Wuhan Iron & Steel in 2016.

Financials for 2016

Income Statement

Revenues grew 13% to reach RMB 185.7bn. Operating profits grew 158% to reach RMB 14.8bn. Net income grew 849% to reach RMB 8.97bn.

Balance Sheet

Baosteel has a total debt-to-assets ratio of 51%, up 3.1% from the previous year.

Cash Flow

Baosteel saw net operating cash flow decline by 22.7% to reach RMB 16.4bn.

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The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Ker Zheng’s personal capacity. It does not in any way represent those of his employer and other related entities. Ker Zheng does not own any companies mentioned.

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