STEEL – INTEGRATED LONG PRODUCERS (OVERWEIGHT)

STEEL – INTEGRATED LONG PRODUCERS (OVERWEIGHT) Sector Update: Seeking the New Sweet Spot
With steel counters back on the limelight, we made a fundamental review and found ourselves looking at a much improved environment of: (i) rising steel prices and expectation of expanding margins, particularly for iron making, (ii) demand set to surge after the Chinese New Year celebration, driven by real demand and improved buying sentiment on positive price trends, (iii) new yearly benchmark prices for iron ore and coking coal likely to increase by 20% to 30%, which will support ASP, (iv) implementation of stimulus packages worldwide have just begun to spur long steel requirements, (v) huge untapped semi finished steel market in SEA region, and (vi) generally still undemanding valuations. These factors prompt us to maintain our OVERWEIGHT stance on the steel sector and raise fair values across the board. We have BUY calls on Lion Industries, Southern Steel and Masteel, a Trading BUY on Perwaja, but a NEUTRAL call for Kinsteel and a SELL on Ann Joo.

Global demand for steel will continue to strengthen in 2010

Perwaja : Target PER raised to 12x Outperform Sino Hua-An : Target PER raised to 12x Outperform%D �nn Joo Resources : Target PER raised to 12x Outperform (up from MP) Kinsteel : Target PER raised to 12x Outperform (up from MP)Hiap Teck Venture : Target PER raised to 9x Outperform (up from UP)%D�SC Steel : Target PER raised to 9x Outperform (up from UP)- We believe the upward price momentum for steel products is likely to sustain over the next 2-3 months, as:%D�) Global demand for steel will continue to strengthen in 2010, underpinned by higher infrastructurespending and economic recovery; 2) Concerns on overcapacity are likely to be downplayed, at least fornow; and 3) Prices of inputs, in particular, iron ore fines, metallurgical coke and scraps will likely to rise%D�urther and this will lend support to steel prices.- In response to the improved outlook of the steel product sector, we are raising our 1-year target forwardPER for the steel sub-sector by 2x from 7-10x to 9-12x.- Given the improved near-term outlook, we are upgrading the steel sub-sector from neutral to Overweight.%D�orrespondingly, our rating for the overall building materials sector is also upgraded to Neutral.- Top picks for the sector are Perwaja (OP, FV = RM1.93) and Sino Hua-An (OP, FV = RM0.71). We alsolike Ann Joo Resources (OP, FV = RM3.53), Hiap Teck Venture (OP, FV = RM2.01) and CSC Steel (OP,%D�V = RM1.64).