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Author: FutureEyes   |   Latest post: Sat, 4 Aug 2018, 12:09 PM

 

Megasteel Closure: Impact on Mycron & Choo Bee

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MEGASTEEL closure: Impact to MYCRON  & CHOO BEE going forward

There are two types of HRC, Iron Ore based HRC and Scrap based HRC.

Scrap based HRC produces Scrap based CRC and Iron Ore based HRC produces Iron Ore Based CRCbefore being used in the next downstream manufacturing process.

Scrap based CRC is used by downstream manufacturers mainly in the Steel Tube and Furniture sectors.Iron Ore based CRC (higher grade) is used for Automotive industry application and Electrical appliances. Refer Link 1 below, Page 8 under Domestic CRC structure for details.

 

Megasteel produces only Scrap Based HRC

 

(A) Let us first determine how much does Mycron use Scrap Based HRC per annum as its raw material.

It is reported on Financial YR 2015 annual report that it uses ‘Scrap based HRC’ as its raw material solely from Megasteel for its Steel Tube manufacturing segment. Refer Link 1, page 12 second paragraph on its annual report.

Link 1: Mycron Annual Report

http://cdn1.i3investor.com/my/files/dfgs88n/2015/11/06/1483789631--639706738.pdf

Referring to Melewar’s annual report, one can see the total throughput in tons of HRC processed as 73 ton / annum with the last qtr reaching 20 ton/qtr at 55% of its rated capacity, refer Link 2 Section ‘1.3 Steel Tube Operations’ on Table 4. My estimation for 2016 based on the reported revenue of RM 206M for the Steel Tube segment alone comes to approximately ~ 90 ton /annum of Scrap based HRC processed.

Link 2: Melewar Annual Report:

http://www.melewar-mig.com/investorsinfo_cmmsg.html

Note that Scrap based HRC which is cheaper can only be used for such Tube segments unlike for Car Manufacturing application and other higher quality CRC making which requires Iron Ore based HRC. So it is important to note that only Scrap based HRC users in the market stand to gain and not the Iron ore based HRC users unlike what ‘SuperInvestor’ had highlighted vaguely for steel manufacturers, due to Megasteel closure.

Another one good example of beneficiary is Choo Bee who uses Scrap Based HRC for its Manufacturing section. Mycron’s Iron ore based HRC are sourced internationally for its CRC making segment, refer Link 2 section 1.2 Cold Rolled operation 2nd paragraph after Table 3. The expected gain on the Iron Based CRC making segment is beyond this article’s scope as we are only concern on Megasteel closure impact.

 

(B) Now let us determine realistically what would be the reduction on the cost of Scrap Based HRC when sourced externally, now that Megasteel is closed?

Of course we have to assume now, the Duty imposed for import of HRC will be removed as it does not make sense to retain it as there is no longer anyone to be protect for. To get an idea, we should find out what was the duty imposed. Please refer Melewar’s annual report under section 1.5 paragraph number 9. It says the existing import duty is 15%.

Link 2:

http://www.melewar-mig.com/investorsinfo_cmmsg.html

Note that Megasteel had demised while 'gasping' for an additional 40% duty to restrict the cheaper HRC supply from China (makes me wonder how big the price difference was from external source! smiley )

Using an estimated cost of HRC from WealthWizard publishing earlier – link 3 below as RM 1600 per ton, the duty value of 15% translates to 15% x RM 1600 per ton as ~ RM 240 per ton.

Link 3:

http://klse.i3investor.com/blogs/wealth123/103812.jsp

Further note that as per below news from TheEdge dated 13 June, Megasteel is charging a premium of RM 400 – 500 per ton for the Scrap Based HRC – refer Link 4.

Link 4:

http://www.klsescreener.com/v2/news/view/81555

Using the above 2 information, and conservatively placing a 50% discount to cater the market dynamics to reach an equilibrium, we can safely say that the Scrap Based HRC users will at least benefit by RM 250 per ton by externally sourcing their Scrap Based HRC. (Frankly speaking I don’t see any reason why they could not save as being claimed by Mr Tan).

 

(C) Now let us see the impact on the bottom line for Mycron, by multiplying the throughput above of `73 ton/annum by the Savings of RM 250 / ton and the Tax rate of 25% to obtain: PAT of 18.3 Million per annum.

This translates to additional EPS of 5.0 cents on top of the normalized EPS of 22.4 cents based on the Projected next 4Q net profits of 63.3M by WealthWizard as per below article earlier:

Link 5:

http://klse.i3investor.com/blogs/wealth123/103812.jsp

Similarly, one can easily calculate for Choo Bee based on their reported processing capacity of 108 ton per annum, though I am not sure on its utilization rate………I leave the surprise number to be discovered by the readers.

One can view the additional EPS as a Margin of Safety if they like..especially those who are extra conservative.

As such i see with SUFFICIENT CLARITY a very bright future for Mycron and Choo Bee  

No vagueness here...

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Labels: MYCRON, CHOOBEE

Related Stocks

Chart Stock Name Last Change Volume 
MYCRON 0.295 0.00 (0.00%)
CHOOBEE 1.52 0.00 (0.00%) 100 

  9 people like this.
 
Albukhary Good sharing. Thumb up!!
17/09/2016 1:41 PM
Trump Good sharing, but if like that, why this four CRC players : CSCSteel, Mycron, Emetall and YunKong required by the Government to buy their HRC requirements from Megasteel?

http://www.kinibiz.com/story/corporate/2572/miti-to-protect-crc-manufacturers.html
17/09/2016 6:02 PM
FutureEyes Two ways Government can protect Megasteel, one by quota of the raw material used by these companies and the other by the Duty on imported HRC. The latter strategy must have been more viable as it would be practically impossible for the manufacturers to produce product mix having compositions requirements as per the quota (ratio) accordingly.

I trust quota strategy did not work out and they relied on the Duty imposed. I am unable to find a clear guideline or confirmations on such quota in 2015.
17/09/2016 6:33 PM
confuse Why must Megasteel closure help others and not themselves? If reopen back how?
17/09/2016 6:58 PM
confuse Will there no steel supply interuption from Megasteel closure? No impacts on ongoing projects?
17/09/2016 7:13 PM
ronnietan I couldn't find any ref from FutureEyes' link if CSC Steel produces iron-ore based CRC only, and not any scrap-based CRC.
In any case, there are now anti-dumping duties on CRC, which allows CSC Steel to obtain better prices for its CRC products, as shown in its June quarter results.
17/09/2016 7:20 PM
FutureEyes Refer link below: A8 - Segment information (*)

http://klse.i3investor.com/servlets/staticfile/287473.jsp

*GALVANIZED STEEL COILS seem to be 100% of its products.

and referring to link below:

http://www.mycronsteel.com/chairmansmsg.asp

Extracted under Domestic CRC Structure:

The 'higher quality Iron Ore Based CRC', is used by downstream manufacturers, mainly involved in producing steel drums for the petroleum and palm oil sectors, in making components for the automotive industry, in producing steel sheets for color coating and GALVANIZING PURPOSES.


From above two information, i am unable to convince myself if CSC STEEL uses any Scrap based HRC.
17/09/2016 7:40 PM
Trump If you say CSCSTEL just produces iron ore based CRC, then before MEGASTEEL closed, why CSCSTEL bought raw materials (scrap based HRC) from them?

http://www.kinibiz.com/story/corporate/2572/miti-to-protect-crc-manufacturers.html
17/09/2016 7:51 PM
FutureEyes That was 2013...they might have changed their product mix considering which is more competitive (to avoid constraint imposed by high cost raw material from Megasteel), unlike Mycron who had procured the Steel Tube Segment ~ 2 years ago and did not have the luxury to do so.
17/09/2016 7:56 PM
FutureEyes This also partly answers the reason for Megasteel's demise.
17/09/2016 7:59 PM
BLee Petroleum industry? O&G at d moment downtrend. Could it b one of d reason of Megasteel closure?
17/09/2016 8:07 PM
FutureEyes Major cost of production is Fuel. This is an energy intensive business.

Fuel is burnt to produce whatever heating requirement in the production process - smelting.

Fuel via a gen set is used to convert to electrical energy which drives all the machines in the HRC making. It takes a lot of energy to move & mold steels.

Despite the extremely low fuel price environment, if Megasteel is unable to pay the bills, i am afraid they never will.
17/09/2016 8:42 PM
Benjamin_8888 Futureeyes lu sure bo major cost is fuel? haha
17/09/2016 9:42 PM
FutureEyes Benjamin, that is true fundamentally in an overview. However, i am of the opinion they do not generate electricity by themself as it appears they have not paid the electricity bills. Electricity tariff is in theory related to fuel cost. But it all depends on government policy.

But i am certain fuel is the major cost for heat generation purpose. Perhaps you can enlighten me more.
17/09/2016 9:51 PM
Benjamin_8888 Megasteel pakai electric arc furnace, x pakai fuel la boss
17/09/2016 10:34 PM
FutureEyes Ok. Its EAF instead of BOF. Guess government policy did not help the lower energy (electricity) cost. Probably the China manufacturers are using BOF technology, and thus have the added advantage of lowering fuel cost. Thanks Benjamin.
17/09/2016 10:46 PM
Benjamin_8888 maybe and thanks sharing your research, I will check with my brother on cscstel
17/09/2016 10:55 PM
FutureEyes Really appreciate that Benjamin.
17/09/2016 10:58 PM
moneySIFU Great write up & thank you for sharing, FutureEyes!!!

More & more good articles with different points of view, it proved we do not need to rely on so called experts from Newspapers & Investment Bankers.
17/09/2016 11:13 PM
probability He left CHOO BEE so mysterious liao!..he he
17/09/2016 11:34 PM
chonghai CSCSTEEL will definitely also benefits from closure of MEGASTEEL. As of February 2016 they still purchase from MEGASTEEL.

http://www.stockhut.com.my/news/89041

One of CSCSTEEL's bad quarter was due to inability of MEGASTEEL to deliver material on time.
18/09/2016 12:18 AM
FutureEyes Thanks for the excellent info chonghai.
18/09/2016 12:42 AM
Trump You are good, chonghai. Thumbs up.
18/09/2016 7:54 AM
moneySIFU Thanks for sharing, chonghai, didn't see this old news but very useful.
18/09/2016 10:48 AM
moneySIFU Sometimes one or 2 paragraphs in each news will give lots of hints or pictures about what's going on in the industry. What if read tens of these news? The whole picture will be shown in front of us and this will enable us to make better informed investing decision.
18/09/2016 10:51 AM
probability Chonghai...u mean one of CSCSTEEL's better quarter results. I think its like when MEGASTEEL cannot deliver, they have excuse to source from China counterpart, China steel at cheaper international price.
18/09/2016 11:58 AM
Benjamin_8888 thanks chonghai
futureeyes yes cscstel used to buy hrc from megasteel.
18/09/2016 4:21 PM
FutureEyes thanks Benjamin. Any clue when they had stopped sourcing from megasteel this year?
18/09/2016 5:03 PM
chonghai Probability, no. I am referring to a quarter where CSCSTEEL experienced a drop in revenue and the drop in revenue was due to MEGASTEEL not able to deliver material on time. Apparently CSCSTEEL did not mitigate with import but I do not know the reason behind.
18/09/2016 5:22 PM
Benjamin_8888 futureeyes bro ur question very sharp.
chonghai, they r unable to do so at that time, compulsory to buy from mega.
18/09/2016 5:50 PM
FutureEyes Choo Bee is just waiting to utilize its full Capacity
21/09/2016 11:47 PM
paperplane Many fund mgr know cscstel, not choo bee
21/09/2016 11:50 PM
probability after Mycron...next Choo Bee?
26/09/2016 1:36 PM
probability C - is definitely possible...

(C) Now let us see the impact on the bottom line for Mycron, by multiplying the throughput above of `73 ton/annum by the Savings of RM 250 / ton and the Tax rate of 25% to obtain: PAT of 18.3 Million per annum.

This translates to additional EPS of 5.0 cents on top of the normalized EPS of 22.4 cents based on the Projected next 4Q net profits of 63.3M by WealthWizard as per below article earlier:
21/10/2016 3:35 PM
probability Estimate done by FutureEyes earlier should come to realisation soon.
13/05/2017 10:30 PM


 

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