Angang Steel drops after downgrade

PUBLISHED : Wednesday, 16 April, 2008, 12:00am
UPDATED : Wednesday, 16 April, 2008, 12:00am

Shares in Angang Steel, the listed arm of the mainland's second-largest steelmaker, plunged 8.21 per cent yesterday in Hong Kong after some analysts downgraded the stock's rating following the company's disappointing earnings.

The Anshan, Liaoning-based steelmaker said on Monday night that last year's net profit rose 6.2 per cent to 7.53 billion yuan (HK$8.39 billion), lagging behind an 8.58 billion yuan average estimate from 21 analysts polled by Thomson Financial.

Fourth-quarter earnings totalled 969 million yuan, down 45 per cent from the third quarter, according to analysts' estimates. The company's outlook remained grim with iron ore and coking coal costs rising, despite a 2 per cent gain in first-quarter profit, analysts said.

Credit Suisse cut Angang's rating to 'underperform' from 'neutral' and lowered its 2008 earnings forecast by 4 per cent and 2009 earnings by 22 per cent.

'We maintain our view that the best quarter for 2008 is likely to be the first quarter, and risk on the unit profit for flat products would be on the downside going into the second half, driven by higher input costs and potential demand elasticity under strong steel prices,' Credit Suisse said.

Merrill Lynch downgraded Angang from 'neutral' to 'sell' saying that cost pressures continued this year and 'not only from raw materials, but across the board'.

Angang's H shares fell HK$1.56 yesterday to close at HK$17.44, the biggest drop in almost three months. Its Shenzhen-traded A shares fell 1.9 per cent to 18.97 yuan.

Angang produced 6.42 per cent more steel products, valued at 14.93 million tonnes, last year and raised selling prices, helping to boost sales by 20.3 per cent to 65.29 billion yuan.

But the increase in selling price could not fully absorb the higher costs, resulting in a drop in gross profit margin to 22.2 per cent, from 22.9 per cent.

Profit was also capped by a 69 per cent jump in distribution expenses and a 47 per cent rise in administrative expenses.

Angang said the steel industry would face uncertainty this year, with rising costs and monetary tightening measures by the central government.