DBSVickers Report - 19 March 2008

Ferrochina; BUY S$1.16;
Bloomberg: FRC SP Plant Visit Reinforces
Our Confidence in the Group’s Outlook;
Price Target : 12-Month S$ 2.75 (Prev S$ 2.80)
By: Paul Yong +65 6398 7951

Story: We paid a visit to FerroChina’s production plant in Changshu, Jiangu last week and also had the opportunity to meet up with the Group’s management.

Point: FerroChina’s 3rd reverse cold rolling mill is on track for commercial production by 2Q08 whilst two more galvanizing lines are expected to be up by the second half of the year. After speaking to management, we believe FerroChina’s sales growth in 2008 is likely to be driven mostly by higher volume sales of cold rolled steel coils (CRC), which are currently in short supply and are commanding attractive margins. Demand for high quality galvanized steel also continues to be firm and we expect GP per MT for this product to hold steady, with the Group’s blended GP per MT improving as more higher margin products such as pre-painted galvanized steel coils are produced. At the same time, we have also tweaked our assumptions to match the Group’s current segmental reporting format, which breaks down their products into a) galvanized and pre-painted steel coils, b) cold rolled steel coils and c) others (antisepticised steel coils and cutting & slitting services). We have raised ASP assumptions to reflect current price trends but kept GP per MT largely intact. In summary, we have cut our FY08 earnings estimate by 2% and raised our FY09 earnings estimate by 3%.

Relevance: We maintain our BUY call, with a marginally adjusted target price of S$2.75, based on 10x FY08 earnings. At 4.1x FY08 PER and 3.2x FY09 PER, valuations are undemanding and the Group could be a take-out or investment target for upstream players looking to move into the downstream at this attractive price level.