Asia Enterprises Holding - Steel booming

􀂾 Story: Asia Enterprises Holding Limited (AEH) is one of the
biggest steel stockists in Singapore for the supply of a wide
range of steel products to industrial end-users in Singapore and
Asia-Pacific. With total warehousing space of 45,934 sqm, AEH
owns one of the largest covered warehousing facilities in
Singapore.
􀂾 Point: AEH is a good proxy to ride on the booming demand
for steel products, which is coming in strongly from the
shipbuilding and construction sectors. AEH is also expected to
benefit from China’s, the largest steel producer in the world,
policies against the export of steel products in 2007. As an
established steel stockist, we expect AEH to benefit through: 1)
higher sales volume, and 2) rising price trend for steel products.
􀂾 Relevance: We project AEH’s net income to grow 34% y-o-y
to S$20.6m in FY07. We have a fair value of S$0.71 for AEH;
using 9x blended FY07/08 PER. We have a BUY rating on AEH.
Steel exports from China to reduce. The Chinese government has in
2007: 1) cut export rebates to 5% for stainless steel products and some
specialty steels, and eliminated export rebates for 83 other steel
products on 15 April, 2) went a step further by increasing export tariffs
on some steel products like steel billets on 1 June, and finally 3)
announced that it will eliminate the export rebates for all steel
products beginning 1 July 2007. These are part of its policy to rein in
overall export surplus and to control the expansion of energyconsuming
and resource-intensive industries in the PRC.
Pressure is on prices of steel products to rise. We believe that AEH will
gain from China’s curb on steel products supply. The China Iron & Steel
Association expects China’s steel exports to be equal to 43m tonnes in
2006, at best, vs. the export growth of 110% y-o-y in 2006. The
reduction in steel products from China is expected to cause an upward
pressure to the prices for steel products in Asia-Pacific. Indeed, the first
round of export rebates cuts in April has already seen steel products
generally experiencing 5-20% rise in prices.
The positive impact will slowly filter into AEH’s profits. AEH is expected
to gain from this significant policy change in China. In fact, most of the
steel products have seen 20-30% y-o-y price increase since March 2007,
and AEH is experiencing the typical initial resistance from customers to
higher prices. We believe that the impact from the price increase will be
clearer in 2H07, as customers’ resistance to price increase weaken, while
AEH’s inventory of steel products are still valued at cost with 4-5
months lag. We are estimating a 34% y-o-y jump in net profit to
S$20.6m in FY07, after building in 10% y-o-y increase in average selling
prices for AEH’s steel products.