Steel rolling out a strong 2010

Steel sector Reiterate overweight:
Malaysian long steel makers (Ann Joo, Lion Industries, Malaysia Steel Works, Southern Steel and Kinsteel) staged a strong comeback in 4Q09 after reporting a combined net profit of RM218 million for the Oct-Dec period, more than 100% increase year-on-year and 19% quarter-on-quarter.We attribute the increase in 4Q09 net profit largely to the recovery in steel price, decline in raw material price and cost-cutting initiatives.We reiterate our overweight stance on the steel sector given the bullish outlook.

We continue to like Kinsteel for its exposure to both upstream and downstream steel production, which are expected to benefit from the upsurge in demand and steel prices.We expect margins to recover in 2010 to fuel earnings growth. The decrease in inventory values for three consecutive quarters since December 2008 indicates that steel players have already exhausted/marked down their expensive input (iron ore). As such, the expected increase in steel prices would likely boost FY10 margins and earnings.According to Kinsteel, billet and steel bar prices in January 2010 have rebounded to US$520/tonne and RM2,200/tonne respectively from US$490/tonne and RM2,050/tonne in 4Q09. We expect these prices to continue rising on the back of higher demand for steel from the construction sector. We maintain our target price for Kinsteel at RM1.24, based on 13 times CY10 earnings per share (EPS), which is 8% higher than our 12 times target price-earnings ratio (PER) for the steel sector.

For investors who like to ride through the booming steel sector in China, we recommend Sino Hua-an as it is expected to benefit from rising steel demand due to spike in infrastructure spending under the Rmb4 trillion (RM1.97 trillion) stimulus package. We value Sino Hua-an at 65 sen, based on 10 times FY10 EPS given its smaller market capitalisation.As far as coke price is concerned, we understand from Sino Hua-an that prices have been volatile in the first two months of 2010 relative to the firm coking coal price at Rmb1,400/t. This has resulted in a narrowing spread following the decline in coke price in February. However, we believe the drop in coke price is temporary and foresee the price to strengthen after the Chinese New Year. — TA Securities, March 5