Investment Highlights

• We maintain our HOLD call, forecasts and FV of RM1.09 based on a book value multiple of 0.5x, consistent with its historical average during the last flat steel downcycle in 2012-2015.

• Key takeaways from our recent visit to the company are:

1) CSC expects a soft year for cold-rolled coils (CRC) in FY19F due to sustained excess supply over demand in the local market, as in the case of FY18. Quoting statistics published by South East Asia Iron and Steel Association (SEAISI), CSC revealed to us that in FY18, CRC supply in the local market hit 1.9mil tonnes (dominated by imports at 60-70% of total, vs. domestic production at 30-40% of total), surpassing demand at only 1.6mil tonnes.

The local market will continue to be flooded with cheap imports from China, Vietnam, South Korea, Japan and India, unless the Ministry of International Trade and Industry (MITI) decides to impose new safeguard measures. We understand that MITI’s investigation into the dumping of CRC by certain foreign players into the local market could be completed within the next 1-2 months.

At present, CRC imports from China, South Korea and Vietnam are subject to 5-year anti-dumping duties (from May 2016 to May 2021) of 3-24%. However, they could be exempted from the duties if their end-use is labelled as automotive (even though they may not be ultimately used in the automotive industry), or they are imported as alloy (by adding certain chemicals) which is not subject to the duties.

In FY18, CRC made up 45% of CSC’s total sales value.

2) CSC is more upbeat on the prospects for galvanized steel (GI) that made up 32% of its total sales value in FY18. This follows the imposition by MITI of 5-year anti-dumping duties (from Mar 2019 to Mar 2024) of 3- 16% on a long list of Chinese and Vietnamese producers. CSC hopes to restore its local market share in FY19F back to a peak of 19% in FY15.

3) CSC guided for sustained high prices for input hot-rolled coils (HRC) in FY19F that could continue to crimp margins as HRC make up 80% of total input cost for the production of CRC. We believe otherwise. Having risen substantially from USD600/tonne in 2016 to USD800 in 2018 driven largely by the booming auto sector in China, HRC prices are poised for a major correction on the back of: (1) The slowdown in the auto sector in China; (2) Auto producers switching to lighter materials for car bodies such as aluminium; and (3) new HRC capacity coming on-stream in China (invested during the good years a few years ago). Already, HRC prices have been on a downtrend in China after peaking in May-Oct 2018 (Exhibit 1).

Ceteris paribus, weaker HRC prices are positive to CSC. However, weaker HRC prices also result in lower production cost for foreign CRC players, allowing them to dump their CRC at even lower prices in the local market.

• We remain cautious on the prospects of the local flat steel producers amidst steep competition from cheap imports in the market. Pending further anti-dumping investigation, and subject to the outcome, and the imposition of new safeguard measures by MITI, the local flat steel players will continue face margin compression as they have to match the depressed selling prices by foreign players in order to protect their market shares.

Source: AmInvest Research - 27 Mar 2019