Delong Holdings: Resilient performance despite rough industry conditions
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Delong
Broker House: OCBC Investment Research
Analyst: Kelly Chia
Price: $3.60
Target : $4.56
Recommendation: BUY
Upside: 26.67%
Summary:
Resilient performance. Despite government regulatory cooling measures in the steel industry through sudden tax rebate cuts in May 07, hot-rolled steel coil (HRC) producer Delong Holdings (DLNG) gave a credible showing with 1H07 sales rising 37% YoY to S$646.2m. 1H07 net profit rose 26.1% YoY to S$77m despite incurring its first year of tax expense of 15%. On a quarterly basis, 2Q07's bottomline came in 8.1% YoY lower than 2Q06 due to rising raw material costs and slightly lower ASPs as the supply of steel increased locally.
Analyst: Kelly Chia
Price: $3.60
Target : $4.56
Recommendation: BUY
Upside: 26.67%
Summary:
Resilient performance. Despite government regulatory cooling measures in the steel industry through sudden tax rebate cuts in May 07, hot-rolled steel coil (HRC) producer Delong Holdings (DLNG) gave a credible showing with 1H07 sales rising 37% YoY to S$646.2m. 1H07 net profit rose 26.1% YoY to S$77m despite incurring its first year of tax expense of 15%. On a quarterly basis, 2Q07's bottomline came in 8.1% YoY lower than 2Q06 due to rising raw material costs and slightly lower ASPs as the supply of steel increased locally.
Outlook for Chinese steel industry. China's macro control policies have somewhat cooled the red hot construction and machine building industries, slowing the demand for steel consumption. Despite these measures,industry watchers anticipate a 4-5% YoY increase in steel consumption in China for FY07 and even stronger consumption in FY08.
Optimistic of prospects in 2H07. DLNG has reported that its diverse pool of customers from the booming Bohai Economic Circle continue to display strong demand for its HRC products despite the rise in supply. Management has indicated that its HRC ASPs have already stabilised in Jul 07 (just 1 month after government intervention) and is expected to maintain or even rise incrementally in 2H07 as it focuses on selling better grade HRCs. Rising raw material costs will also be mitigated when its Phase 3 technical enhancements are completed.
Waiting for the big acquisition. Management has updated that it is in deep discussion with 2 potential acquisition targets to incrementally achieve 10m ton/yr capacity by 2010. In our last report, we forecasted that DLNG will need to acquire about 2m tons/yr to achieve this target. We anticipate that DLNG will not acquire any plant with capacity larger than 3-4m tons/ yr in its maiden M&A to prevent overwhelming integration issues.
Strong outlook. As capacity reaches 3m tons/yr by year end with the plant at full utilisation and M&A to increase output, we are confident that FY07/08 will be strong years. DLNG's exposure to raw material price increases will also be mitigated when its 2 new furnaces to process pig and molten iron come online progressively by end FY07. We maintain our BUY rating and fair value of S$4.56
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