• Global steel demand is expected to grow marginally by 0.5% (FY17F) and 1.0% (FY18F) from 1.5bil MT currently, underpinned by economic growth in some regions, particularly in the emerging economies driven by the construction sector. Meanwhile, global production supply is expected to remain flat at 1.6bil MT FY17F/FY18F, with an estimated 2.3bil MT annual capacity and average capacity utilisation of ~70%. The ongoing cuts in China steel production as well the imposition of safeguard duties by the Malaysian government for imports from China has shown positive sign to local steel players.

• There are various steel products. amongst others, hot rolled coil (HRC) – flat steel, long billets – reinforcement bars and cold rolled coil (CRC) – widely used in the manufacturing sector such as automotive, electrical appliances, furniture and others. Currently, the dominant manufacturer of CRC steel is CSC Steel Holdings (CSCM).

• The positive outlook for steel as well as strong local demand is a major boost to CSCM earnings outlook. The key drivers for the earnings growth are:
  o Strong backing from parent company – Being the subsidiary of the largest steel company in Taiwan, CSCM is set to benefit from the uninterrupted sourcing of raw material i.e. supply of HRC directly from parent company, translating into lower cost of doing business. Additionally, CSCM continues to produce high-grade steel through technological enhancement from the research and development (R&D) of the parent company.
  o Sustainable future growth – CSCM will actively continue to improve its existing products through R&D of its parent company to high-grade steel products to cater the demand of the domestic market. Also, CSCM plans to increase its type of products and to expand its business aggressively to cater for the export market.
  o Effective business model – The company is constantly upgrading its existing equipment in order to maintain business efficiency at optimum level.
  o Healthy dividend payout – As part of the company dividend policy, CSCM will pay dividend at least 50% which translates to yields of around ~6-8% annually.
   
• We project its FY17/18 earnings to grow 5%/10% underpinned by: 1) it is one of the dominant local CRC players in the market; 2) ASP is expected to improve with the ongoing reforms in China as well the imposition of safeguard duties from 2016 till 2021; 3) cost optimisation in production enables it to maintain better margin than its peers. We initiate coverage on CSCM with a BUY call and FV of RM2.14 based on 10x FY18F EPS, in line with the average forward PE of major global key steel producers.

Source: AmInvest Research - 31 Jul 2017