Highlight

For steel subsector. There have been several positive news flows for the steel sub-sector of late, showing early indications that the sector may recover from its weak performance in 2013, which include: (1) More effective measures in cutting steel capacity in China; and (2) Declining key steelmaking input prices. Despite some early signs of recovery, we believe it is too early to turn more positive on the sub-sector’s earnings outlook as: (1) It remains to be seen if the Chinese authority will succeed in cutting down the country’s steel industry; and (2) Higher energy costs to impair players’ razorthin earnings.

For cement sub-sector. We remain positive on the cement sub-sector’s earnings visibility, underpinned by: (1) Still decent demand outlook arising from the continued roll-out of infrastructure and property-related projects; and (2) Lower coal price, which will offset higher electricity tariff.

We adjusted our FY14-15 earnings forecasts lower by 4.3- 28.3%, largely to account for higher electricity cost. Earnings adjustments aside, we are also taking this opportunity to roll forward our valuation base year from CY2014 to CY2015. Post earnings adjustments and roll-forward of valuation base year, our TPs for stocks under the building materials sector were raised by 0-20%.

Catalys

• Steel sub-segment
• More effective measures introduced by the Chinese authority to curb steel capacity
• Cement sub-segment
• Timely implementation of ETP projects; and
• Sustainable demand from property development projects.

Risks

• Overcapacity in China remains over the longer term;
• Volatile input prices, making the sector a play on short-term potential price trend.

Rating

Neutral

Steel sub-segment

Negatives – Overcapacity results in volatile earnings.

Cement sub-segment

Positives – Positive demand outlook.

Negatives – Pricey valuation.

Sector View

We are maintaining our Neutral stance on the building materials sector.

Source: Hong Leong Investment Bank Research- 21 Jan 2014