• We are maintaining our less bullish view on the steel subsector’s near to medium-term outlook, as we continue to see weak prospects of steel players in Malaysia, on the back of: (1) Excess capacity in China, and the absence of effective anti-dumping measures in place locally, will continue to hurt prospects of local steel producers in Malaysia; and (2) Declining key steel making input prices (in particularly iron ore and coking coal), which will hurt stockists’ restocking activities. Cement sub-sector

• We expect price competition among the cement players to continue ahead of the completion of new capacities in order to protect their respective market shares. Nevertheless, we do not expect price competition among the players to intensify significantly, as the cement segment is dominated by only a handful of players, and most cement players (if not all) have strong balance sheet and operating cash flow (which in turn indicates that cement players do not have to cut cement prices aggressively in order to generate cash flow). Catalysts Steel sub-segment

• More effective measures introduced by the Chinese authority to curb excess capacity; and

• Implementation of effective trade action by the Government on influx of cheap imported steel products. Cement sub-segment

• Timely implementation of infrastructure projects; and

• Declining energy prices, in particularly, coal.

Risks

• Excess capacity for the steel sub-segment; and
• Volatile currency movement and intensifying price competition for the cement sub-segment.

Rating

NEUTRAL Steel sub-segment

Negatives

• Weak earnings prospects arising from excess capacity. Cement sub-segment

Positives

• Commendable demand outlook, and strong balance sheet,

Negatives

• Price competition, and low trading liquidity. Sector View
• We are ceasing coverage on Ann Joo (TP: RM1.02) and CSC Steel (TP: RM0.95), due to relocation of resources, as well as the weak steel sub-sector’s weak prospects. For exposure to the building material sector, our preferred pick is Lafarge Malaysia (BUY; TP: RM10.72).

Source: Hong Leong Investment Bank Research - 24 Jul 2015