Angang's products ranging from cold-rolled sheets for containers and home appliances to pipes and heavy plates used in shipbuilding and cars still enjoy fatter margins than construction steel products that rivals such as Maanshan Iron & Steel and Chongqing Iron & Steel produce.

A lower iron ore cost also helps it maintain a higher margin. Angang gets its ores mainly from its state-owned parent at 5 per cent discount to the market price.

Also, a long-awaited merger with Benxi Iron & Steel Group at the parent level, and the start of production at the Bayuquan plant in Yingkou later this year also add to reasons behind a higher valuation on the stock. But the deteriorating operating environment of the mainland steel industry - as Angang's disappointing earnings reflect - has led some analysts to rethink their recommendations.

Credit Suisse downgraded Angang to 'underperform' from 'neutral' and revised down its forecast for this year's earnings by 4 per cent and next year's by 22 per cent to reflect a more updated average selling price and cost trend.

Credit Suisse pointed to a possible downtrend in Angang's profitability. It said that while averaging 971 yuan a tonne for the full year, the unit profit of Angang's steel products fell 31 per cent to 792 yuan a tonne in the second half from the first.

Although Angang's first-quarter profit this year rebounded and rose 2 per cent year on year or 155 per cent quarter on quarter to 2.44 billion yuan, implying unit profit surging 430 yuan to 1,170 yuan a tonne from the fourth quarter, Credit Suisse said it still saw downside risk.

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

Despite that, the Swiss investment bank still projected that Angang would report earnings growing this year to 9.02 billion yuan, but added that profit was likely to decline to 8.6 billion yuan next year.

Merrill Lynch analysts Alexander Latzer and Irene Ye also downgraded Angang to 'sell' from 'neutral' after the results, noting its 15 per cent valuation premium to global peers.

Angang warranted a higher valuation because it delivered consistent earnings, stable margins, and healthy volume growth. Now only the last factor remains intact, they said.

They also noted 'risks to steel prices' on the mainland in the second half 'on supply restarts after rapid price increases in the first-half'.

Production at Angang's 22.6 billion yuan, 5 million tonne a year Bayuquan plant will be delayed until August from May, the firm said recently, thus curbing its contribution to this year's earnings, Citigroup reported.

Citigroup also thinks that Angang will suffer from higher iron ore costs, a possible steel product supply glut from significant capacity addition, potential for production delays, and higher than expected capital expenditure with the Bayuquan plant.

'We continue to think that margins will deteriorate in the second half, given our forecast for slowing demand and continued cost pressures,' the American investment bank said.

Angang produced 6.42 per cent more steel products, bringing volume to 14.93 million tonnes last year.

Along with higher selling prices, the steelmaker was able to raise sales 20.3 per cent to 65.29 billion yuan from a year earlier.

But the increase in selling prices failed to offset entirely the rise in costs, which trimmed the firm's gross profit margin to 22 per cent from 23 per cent a year earlier.

Angang still has some believers, though.

Song Shen and David Pow at Goldman Sachs remain 'very positive' on the stock and reiterated their 'buy' recommendation on Angang's positive earnings outlook for this year, even though last year's profit fell short of their expectations.

The mainland's average steel price is still about 20 per cent below the global level. They said the spread would offer further upside, as Angang has more staying power to increase exports while small mills are hurt by raw-material shortages.

They argued that given the long lead time for large mills to build new plants and the rising cost of raw materials holding back small mills, the market would see at least two to three years of further tightening in supply.

World steel demand will remain robust and will rise 6.7 per cent to 1.28 billion tonnes this year, led by emerging markets including the mainland, India, Russia and Brazil, according to a forecast by the International Iron & Steel Institute.

The research group expects consumption to rise 6.3 per cent to 1.36 billion tonnes next year. Domestic demand would grow 11.5 per cent this year, taking China's share of world steel consumption to 35 per cent. Next year, the country would require 10 per cent more steel.

Goldman expects Angang's second-quarter gross profit margin to improve to 27 per cent. It forecasts earnings of 3.3 billion yuan in the second quarter, up 34 per cent from the first or up 36 per cent year on year, on further product price increases.

JP Morgan analysts Zhang Feng and Emily Zhang, who have an 'overweight' rating on Angang, also share that view.

Angang raised its benchmark cold-rolled steel prices 14 per cent this month from last and 3 per cent for next month, implying an average price of 5,445 yuan a tonne in the second quarter, an increase of 875 yuan a tonne from the first quarter. Hence the analysts expect a strong second-quarter profit.

The company's share price has slumped 10.7 per cent in the week since the results release last Monday. The stock is now near the price target of some bearish analysts. If it is just a matter of valuation, is this a reasonable entry level?