Source of opportunity We upgrade Angang to Buy from Neutral and put it on the Conviction Buy List with a 12-month P/E based target price of HK$27 for three reasons: (1). Increasing downside protection. New data points suggest marginal players already have a return below the 3Q06 macro tightening level, largely pricing in potential headwinds from export tax or macro tightening. (2). Upside leverage could be enhanced by potential acceleration of Bengang merger, earlier than expected commissioning of Yinkou greenfield, adding volume upside of 3-52%. (3). Potential upside/downside at 49%/12% does not include Bengang merger, which could potentially improve the ratio to 87%/5%.
Catalyst (1). Further strengthening of steel prices. Hot rolled (HR) prices rebounded for the first time last week after eight consecutive drops. (2). Strong interim earnings in late August with our forecast of Rmb5,040mn, 66% yoy growth and 9% above consensus. (3). Potential breakthrough in merger with Bengang, per media reports, 48% capacity and 28% earnings upside, “Bluesky” valuation HK$34. (4). Earlier than ------
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