钢铁业第2季标青的考量 (1)- YiStock




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Hi all,

Many steel companies releases superb Q2 2016 quarterly result. Co-incidentally? Or memang macam ini?

As 旁观者,I would like to offer come points of consideration for SERIOUS investors (not for speculator or sales man).

I cannot guarantee my interpretation is correct, but please verify yourself.

What most important, if BANKER want to push price, none of the points is valid.

Investors, please agree to disagreement on what i'm sharing.

Let Start:

The are several POSITIVE catalyst that "benefiting" the steel companies.

1) global HRC & CRC price is appreciating from early of the year to now. One main factor is China has been working on “去产能” of steel capacity.

2) general public is expecting Malaysia may be imposing "anti-dumping"duty on steel products imported from China.

3) temporary closing down of one major local "monopoly" factory which may help other players to start import HRC from other "cheaper source"

There is one main NEGATIVE sentiment that disturbing the steel industry.

1) Malaysia local economy is rather weak (non-infra works, maybe). Why Malaysia?



BELOW the point of consideration

1) Why Malaysia?

Because most of the steel product manufactured by these companies are for local consumption. Example, Cxxxxxx, 2015 Annual Report, Total Revenue 461 mil (94% local) Vs 2014 Annual Report, Total Revenue 494 mil (93% local). So when you are doing local biz, i think is quite challenging.

2) Why not focus export?

 I think we cannot beat China.

3) Most steel companies have 2 major segment:  MANUFACTURING of FINISHED STEEL PRODUCTS + TRADING OF THE FINISHED PRODUCT.  Is important to distiguish these 2 and to confirm which is main contributor of profit.

Regardless of either sector, the rule of dumb is " higher raw mat cost = higher selling price but not necessary higher profit"

Use one company as example.

When MANUFACTURING SEGMENT (different entity but under same group of companies), received higher raw mat cost, it will produce the "more expensive" steel product and "sell" it higher to TRADING SEGMENT and the trading segment will sell "more expensive" to end users. Fair?

Are they using "cheaper" in-stock inventory (purchase in Q4 15 / Q1 16  or much earlier period) and take opportunity of recent high price of HRC/ CRC to sell  higher finished product via Trading Segment.? Reason i suspect is:

Manufacturing segment:

2016 Q1 Revenue - RM 41.8 mil , Profit - RM 2.6 mil

2016 Q2 Revenue - RM 28.6 mil, Profit - RM 4.9 mil

Noticed above Manufacturing segment revenue drop 13 million or  -32% but profit up 2.3 mil or +88%. From here, the manufacturing segment does not seem to do well from Q1 to Q2

Trading Segment:

2016 Q1 Revenue - RM 60 mil, Profit RM 1.6 mil

2016 Q2 Revenue - RM 70 mil, Profit RM 8.5 mil

Noticed above Trading Segment sell extra RM 10 mil or +16% but Profit up by RM 6.9 mil or + 431%.

So, TRADING SEGMENT IS main PROFIT CONTRIBUTOR

Not much manufacturing activity, but higher trading revenue. I suspect they are selling off a big portion of older finished goods inventory (at lower cost) at higher price (by taking opportunity of price hike)

It is not wrong, just like CPO stocking strategy.

So long as the companies have enough OLD CHEAPER STOCK TO SELL, then profit MAY continue to soar. Provided REVENUE IS ALSO GOOD.  便宜的存货高价卖? Let wait and see.

(I DIDN'T drill deeper because the financial statement did not categorized the raw mat inventory balance / fininished steel product inventory balance.



4)  Global HRC & CRC price is appreciating - this eventually will increase the cost of Manufacturing Segment & Trading Segment. BUT MARGIN may not be so good. 贵的新货贵卖, margin may be reduced compared Q2 2016.  Let wait and see.



5) players can start to import HRC from other "cheaper source" and start producing cheaper finished products. But, can it be sell at higher price?  便宜的新货高价卖? or 便宜的新货便宜卖? When local business is slow down, which will be the way? Let wait and see.

6) Start "Importing" and sell locally ? Foreign currency exposure risk may increase. Not easy to hedge if you are not buying cash. There is not much of natural hedge because you import but sell local.  If Ringgit goes weaker, will the "cheaper" raw mats still cheaper?



Above just my 2 cents of consideration. While i'm still considering, price keep rocketing. Congratulation! Maybe 见 好 就 收?

1) Don't trust me, because Gkent really sky rocketing, and congratulation to Gkent holders. But i'm more afraid of risk if bankers didnt come in to push the price.

2) Further more, demand for steel product may up due to roll out of huge infra project, provided "anti dumping" duty is imposed.

3) China, who dare to offend the tai-go?

4) Remember the Geshen special item? This company has it also. Not much, just RM 3 mil in Q2 2016.



Cheers!

YiStock