FY17 preliminary results beat consensus and DB estimates

Baosteel announced its 2017 full year preliminary results after market close onJanuary 25. The company estimated 2017 full year NPAT to be from RMB19.1to 19.8bn. This beats both DB and Bloomberg consensus, achieving c. 135%FY17 DBe and 117% Bloomberg 2017 full year estimates. The preliminaryresults should be viewed positively by the market and potentially trigger streetanalysts to further upgrade their estimates into 2018.

Supply-side structural reform and Baowu synergy drove profit growth

The supply-side structural reform in 2017 significantly improved the supply anddemand dynamics of steel sector in China. The synergy from Baowu mergerand Zhanjiang project also increased the company’s productions and profitswith strong cost advantage compared to industry peers. We believe that themerger synergies will likely continuously be realised and are likely to lead tostrong profitability of Baosteel in coming years.

Positive supply and demand dynamics, maintain Buy

Based on the preliminary results, the implied 2017 ROAE is c.12-13%,increased by c. 6 percentage points from last year. We believe furtherimprovement into 2018 is still highly likely due to the impacts from ChinaSupply Side Reform and synergies from the Baowu merger. That makesBaosteel's current valuation at 1.1x 2018DBe BVPS not demanding in our view.Meanwhile, from recent Baosteel's communications with investors, we don'trule out the possibility of cash dividend pay-out increase resulting from thecompany's strong free cash flow yield. Overall, we deem Baosteel as the realalpha of Chinese steel sector. Buy reiterated.

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