Founded in 1951, Xinjiang Ba Yi Iron & Steel Co., Ltd （Xinjiang Ba Yi）。 is the leading steel company inXinjiang. After the restructuring in 2007, the company became a major subsidiary of Baoshan Iron &Steel Co., Ltd. （600019.SH）。 Baoshan Iron & Steel, listed in the Fortune Global 500, produceshigh-tech, and high value-added steel, taking a leading position in domestic markets and exportinggoods to over 70 countries. （Source: company’s official website）

Comments

Rise in price and sales volume boost the earnings of Xinjiang Ba Yi. As the largest listed steelcompany largest steel company in Xinjiang, the company has raw steel capacity of 8 mn metric tons,and rolled steel capacity of 8.3 metric tons. Since 2017, steel price and sales volume have keptincreasing, while the rise in the cost of iron ore remains moderate, leading to a large profit margin.

According to its financial projections, 2017 net profit attributable to shareholders is expected tonotch CNY 1.16 bn.

Demand for steel picks up in Xinjiang, indicating opportunities for Xinjiang Ba Yi. 2018infrastructure construction is projected to increase by 15%, which may give rise to a high volume ofsteel consumption. As the largest listed steel company in Xinjiang, Xinjiang Ba Yi may furtherpromote its production and sales. What’s more, currently the goods are mainly sold within Xinjiang.The Belt and Road Initiative may pave the way for Xinjiang Ba Yi to go global.

Three factors stand to promote company earnings in 2018. 1） The consolidated financialstatements show that H117 net profit attributable to shareholders may exceed CNY800 mn,suggesting a two-fold increase compared with the figure before transactions. The financial results ofthe acquired iron-making plants and energy system will be consolidated into the company’s financialreport this year, which we expect will substantially boost earnings. 2） Xinjiang steel price presentssalient premium to that in Shanghai and registers a YoY growth in January. The annual premium isestimated to further enlarge YoY. 3） 2017 witnessed a significant increase in capacity utilization.

With limited capacity expansion in 2018 and growing demand from infrastructure construction,Xinjiang Ba Yi is expected to see further improvement in utilization rate, which will help diluteexpenses to bring down the cost per metric ton. This will further enhance the 2018 earnings.

Given all the above, we revise up Xinjiang Ba Yi’s earnings forecast. We estimate the net profitattributable to shareholders to report at CNY 1.16 bn/ 2.47bn/ 2.72 bn respectively for the year of2017/2018/2019, and EPS at CNY 1.52/3.23/3.55, which implies 10.6x 17PE/ 5.0x 18PE/ 4.9x 19PE,according to its share price in Feb. 5. Therefore, we maintain “Outperform” rating for the company.

Potential risks: Financial risks due to increasing leverage ratio; weaker-than-expected demand in Xinjiang; downward trend of steel prices; surging cost.