We downgrade Building Materials sector to NEUTRAL from OVERWEIGHT previously as we are now expecting the steel sector to be more challenging in the near-medium term. This is premised on the absence of anti-dumping trade actions by the government. We believe the absence of remedies from the government to curb the rising import activities of steel products could lead to: (i) declining local steel players’ market share and (ii) depressed steel prices. In view of this issue, there is possibility of further earnings cuts for CY15 amongst the steel players as current ASPs are ~5.0% lower than our assumed RM2,000/MT. Downside risks is limited at this juncture as the two steel players are trading close to trough PBV valuations. However, the booming construction activities in local market may not help the steel industry recover if the oversupply situation in China persists. Pursuant to the de-rating, we downgrade ANNJOO and MASTEEL to MARKET PERFORM with lower TP of RM1.09 and RM0.92 (previously RM1.47 and RM1.20 respectively) as we lowered our valuation basis. We prefer PMETAL (OP; TP: RM5.18) due to (i) strong aluminium sector fundamentals driven by global demand (ii) industry-leading margins of 16.7% vs global peers’ 6.5% and (iii) bright earnings outlook driven by capacity expansion. Maintain MARKET PERFORM on LAFMSIA (MP; TP: RM10.00) due to rising local competition which could lead to depressed pricing in the near-medium term.

No trade actions to be implemented on rebar. On 30-Jan-15, MITI announced that the anti-dumping probe found that the import of steel concrete reinforcing bars (“rebar”) from China and South Korea does not cause material injury to the domestic industry. Hence, there will be no import duties imposed on rebar. We are NEGATIVELY surprised by the news as we have previously expected that MITI would impose the import duties on rebar to assist local steel players.

Strengthening of steel import since 2012. We notice that the import volume of iron and steel has been consistently increasing since 2012 (refer Chart 1). In terms of value, there was a sharp drop in import prices in mid-2012 and it has been reducing over the years, which has eventually dropped below export prices since April 2013. Despite the weakening of Ringgit, import prices of steel bars continue to decline and remain below locally produced ones. Hence, we believe the impact of strengthening of steel import would be: (i) steel rebar prices likely to be depressed further (we are considering to reduce our FY15E price assumption from RM2,000.0/MT to RM1,900.0/MT (-5.0%), closer to current market price of RM1,880.0/MT). (ii) local steel players’ (steel bar) market share to shrink due to intense competition. This could negatively impact the steel players’ earnings. For instance, we estimate that a 1.0% reduction in ASP/MT will reduce earnings by 4.0% and 3.0% for ANNJOO and MASTEEL, respectively. To recap, the local steel industry has been experiencing a down cycle since 2012 due to global oversupply (Refer Chart 4 and 5). If the volume of cheap imports increases further, we do not rule out the possibility of steel players re-submitting the petition of imposing import duties for steel products. 

Source: Kenanga