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Goldman Sachs

Baosteel shares follow fall in earnings

PUBLISHED : Friday, 28 March, 2008, 12:00am
UPDATED : Friday, 28 March, 2008, 12:00am

Shares in Baoshan Iron and Steel (Baosteel) fell as much as their 10 per cent daily limit yesterday after the mainland's largest steelmaker reported an unexpected drop in net profit for last year.

On Wednesday, Baosteel announced a 2.75 per cent drop in net profit to 12.72 billion yuan (HK$14.11 billion), short of an average forecast of 14.18 billion yuan from 18 analysts in a Thomson Financial poll.

The Shanghai-listed steelmaker said the profit decline was a result of higher raw materials costs and weakness in the stainless and speciality steel market following a plunge in nickel prices.

UBS said Baosteel's results were disappointing and estimated losses from the two segments to have amounted to at least 1.3 billion yuan.

In the past quarter, net profit shrank to 2.17 billion yuan, down 9 per cent quarter on quarter and 43 per cent year on year, according to Goldman Sachs.

Baosteel shares yesterday opened sharply lower and touched the downside limit at 12.92 yuan after 17 minutes of heavy trade. The stock ended down 8.99 per cent at 13.06 yuan, the biggest decline since May 30.

Industry analysts said Baosteel might perform better this year as nickel prices were expected to be more stable, while strong steel prices and tight supply would also help.

Baosteel recently announced a 6 per cent upward adjustment for the price of hot-rolled steel after a 20 per cent price increase from next month, breaking its quarterly pricing tradition, which Goldman considered a 'positive surprise'.

'We believe high carbon steel prices are sustainable with tight supply supporting [Baosteel's] robust earnings growth in 2008,' wrote Goldman analysts Song Shen and David Pow.

They rated the company a 'buy'.

Although there is concern that steel prices will decline in the second half, Baosteel president Fu Zhongzhe yesterday told investors in an online conference: 'The possibility of a steep decline in steel prices is thin in the second half.

'Steel prices will fluctuate within a narrow range at high levels.

'Our motor vehicle customers, mainly high-end, can afford the rising prices.'

Baosteel plans to boost production to 24.55 million tonnes this year from 23.78 million tonnes last year. It will seek acquisitions to meet a target of 50 million tonnes by 2012.

The steelmaker expects sales this year to increase 4.4 per cent to 200 billion yuan from 191.6 billion yuan last year.

Meanwhile, China Oriental Group, a Hong Kong-listed mainland steelmaker, in which the world's largest steelmaker ArcelorMittal has a major stake, yesterday reported a lower than expected 12 per cent rise in last year's profit.

Net income increased to 1.16 billion yuan, from 1.03 billion yuan, below a mean estimate of 1.46 billion yuan from three analysts polled by Thomson.

Sales climbed 38 per cent to 13.5 billion yuan as output increased 10 per cent and the average unit selling price jumped 25 per cent.

China Oriental would set aside 1 billion yuan for capital spending this year, up 25 per cent from last year, to boost its annual crude steel capacity to 6 million tonnes by the end of this year from 4.3 million tonnes at the end of last year, said financial controller Chris Chiu Ngam.

Executive director Zhu Jun said the company was seeking to acquire mills with 2 million tonnes of annual capacity in Hebei province, where its key mills are located, to boost total capacity to 10 million tonnes by 2010.