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Baosteel (600019 CH) Summary

Core Content

Baosteel is a major Chinese steel producer with a significant presence in the automotive steel market. The report outlines its strategic focus, market outlook, and financial performance for the years 2014 and beyond. Despite the overall weak profitability in the global steel industry, Baosteel is expected to maintain strong performance due to its focus on high-end auto steel and its expansion strategy.

Main Points

• Auto Steel Outlook:

  • Baosteel holds a dominant position in the medium- to high-end auto plate market with a 50% domestic volume share.
  • Auto steel demand is expected to grow at a CAGR of 7.17% from 2011 to 2020, while auto sales volume is projected to grow at 10% from 2011 to 2015.
  • Auto steel demand is expected to remain robust, with strong order flow in 1Q14 allowing Baosteel to raise prices despite general steel price declines.
  • Baosteel's auto steel product mix is heavily weighted towards high-end products, including Advanced High-Strength Steel (AHSS), with a market share of 44% in cold rolled AHSS and 42% in galvanised auto steel.
  • AHSS is expected to be key in supporting the auto industry's demand for lightweight and fuel-efficient vehicles.
  • Baosteel is targeting to become one of the top 3 auto steel producers globally by 2018.

• Expansion Strategy:

  • Baosteel's key focus for the next two years is the Zhanjiang project, which is expected to start operations in 2H15.
  • The project has a total investment of RMB41.5 billion, with a total steel capacity of 8 million tons, of which 4-5 million tons are auto steel plates.
  • Baosteel plans to export only 10% of its production volume.
  • For international expansion, Baosteel will focus on setting up service centers and downstream processing plants locally in cooperation with local players to avoid price wars.
  • Baosteel is not pursuing overseas expansion or domestic acquisitions at this time.

• 2014 Steel Outlook:

  • The steel sector in China faces funding pressure, weak cash flows, and high interest rates.
  • Baosteel expects the iron ore price to fall to USD100/t in the long term, with 2014 as a critical year.
  • Baosteel's profitability is more sensitive to downstream demand than to iron ore prices.
  • The company's earnings are expected to improve due to increasing sales volume and higher prices in the auto sector.

• Financial Performance (2012–2015):

  • Revenue is projected to increase from RMB191.2 billion in 2012 to RMB193.6 billion in 2015.
  • Recurring net profit is expected to rise from RMB10.09 billion in 2012 to RMB8.309 billion in 2015.
  • EPS is projected to grow from RMB0.58 in 2012 to RMB0.48 in 2015.
  • Baosteel's recurring P/E ratio is expected to decrease from 8.43 in 2012 to 7.87 in 2015.
  • Dividend yield is expected to increase from 2.82% in 2012 to 5.64% in 2015.

• Market Position:

  • Baosteel's auto steel plate sales volume increased by 19.5% y-y in 1Q14, with AHSS sales volume rising by 220% y-y.
  • The company is the only steelmaker in the world to commercially produce Series I-III AHSS, holding 70% of the domestic market share for Series I AHSS and 100% for Series III AHSS.
  • Baosteel's auto steel products contribute significantly to CO2 reduction in the automotive industry.

• Strategic Goals (2014–2018):

  • Baosteel aims to expand its production and sales of auto steel, with 2014 targets including a 22.07 million ton steel production capacity and 3.2 million ton trading platform transaction volume.
  • The company plans to complete the Zhanjiang project by 2015 and expand its international presence by 2018.
  • Baosteel also plans to expand into non-steel materials, such as aluminum and carbon fiber, and develop integrated services for the auto industry.

• Key Customers:

  • Baosteel's top customers include SAIC, Chang'an Auto, FAW Group, Dongfeng Motor, PetroChina Group, Comat Metal, Midea Group, Sinopec, Guangzhou Automobile Group, and Shanghai Electric.

Key Information

• Baosteel's auto steel demand is expected to grow faster than the overall steel demand.
• The company is not currently expanding overseas but is focusing on setting up service centers and downstream processing plants in collaboration with local partners.
• Baosteel's profitability is more influenced by downstream demand than by iron ore price fluctuations.
• The Zhanjiang project is a key initiative with a 3-year construction period and is expected to boost the company's production and market share.
• Baosteel's auto steel products are environmentally friendly and help reduce fuel consumption and CO2 emissions.
• The company's auto steel business is a key driver for future growth and profitability.
• Baosteel is the largest overseas steel supplier to GM, meeting 50% of its steel needs.

Conclusion

Baosteel is well-positioned in the Chinese auto steel market with a strong product mix and a clear expansion strategy. The company is focusing on increasing production and sales volume, particularly in the high-end auto steel sector, and is not currently expanding overseas. Despite the challenges in the steel industry, Baosteel's strategic direction and market position suggest a strong outlook for its auto steel business in the coming years.