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Baoshan Iron &Steel Co.,Ltd:Reiterate Buy post parent's results

发布时间:2016-09-13    研究机构:德意志银行

Reiterate Buy on Baosteel 2018 and 2020 bonds

We had upgraded Baosteel to Buy in our Asia Credit Monthly report on Sep 8,partly driven by a strong set of results from the HK listed entity. Subsequently,we had a chance to look at the parent's results, which also look quite good.

Improved numbers at both entities were primarily driven by higher productionand ASPs (Figure 2), cost control and capex discipline. We discuss the resultsin more detail and provide key financials later in this note. Maintain Buy.

It's not just the fundamental improvement, but also the valuations that appearattractive to us. Baosteel bonds are 40-50bp tighter YTD, but are still amongthe widest trading in their rating bucket in Asia IG. The 2018s (G+165bp) and2020s (G+185bp) are cheap relative to other cyclical/weaker BBB rated nameslike China Oilfield Services, China Travel Services and Minmetals (Figure 1).

We see fair value for them at 15-20bp tighter from current levels.

Between the two bonds, the 2018s have a keepwell from the listco, which isarguably a stronger entity than the parentco that provides a keepwell for the2020s. S&P also rates the latter a notch lower at BBB (while Moody's equalizesthem at Baa2). However, the 2020s should benefit from roll at year end.

Separately, we don’t expect the ongoing merger talks with Wuhan Steel topush the ratings to HY. Please refer to our note on the proposed merger fromJune 28 for more details.

Key downside risks for Baosteel are decline in steel prices, further WMPinvestments at the cost of raising debt, etc.