《2010年高盛高华能源、钢铁欧亿·体育（中国）有限公司市场研究报告》(6个文件).rar Industry　context Steel　equities　have　pulled　back　by　an　average　of　22%　since　their　April　peak on　concerns　about　the　Chinese　government＇s　property　market　tightening measures.　The　spot　steel　price　in　China　has　fallen　4.2%　for　HRC　and　6.2% for　rebar　in　the　past　4　weeks　to　Rmb4,622/t　and　Rmb4,318/t　(US$677/t　and US$632/t,　incl.　VAT)　respectively.　However,　we　believe　the　market　may　be too　concerned　on　steel　mills＇　margins　and　downstream　demand. Source　of　opportunity Our　analysis　of　steel　mills　profitability　and　steel　demand　shows　that　the market　may　have　priced　in　a　worse-than-expected　potential　slowdown. (1)　Potential　margin　squeeze　may　be　less-than-expected.　Although　the steel　price　has　fallen　by　4%-6%　in　the　past　month,　the　iron　ore　spot　price has　also　dropped　8%　in　the　same　period.　Even　taking　into　account　the　lag in　consuming　iron　ore　inventory,　which　we　estimate　to　be　one　month based　on　ports　inventory　and　annualized　iron　ore　consumption,　the　steel price　still　has　a　Rmb350/t,　or　7%,　gap　before　it　falls　to　a　breakeven　level. However,　Baosteel＇s　valuation　has　fallen　to　its　4Q08　trough　of　below　100% EV/replacement　cost　when　demand　collapsed,　there　was　no　sign　of recovery　before　the　stimulus　package　and　the　steel　industry　profitability turned　to　a　loss.　We　believe　the　current　trough　valuation　is　unwarranted　as it　is　unlikely　that　profitability　and　demand　would　fall　back　to　that　level. (2)　Scenario　analysis　on　steel　demand　shows　a　3%　decrease　in　property FAI　can　be　offset　by　1%　increase　in　infrastructure,　1%,　3%　and　6%　increase in　machinery　exports,　white　goods　production　and　auto　production respectively,　while　ytd　growth　in　these　downstream　demand　sectors　has been　much　higher　than　these　percentages,　despite　an　expected　growth　rate slowdown　in　2H　due　to　a　high　base　in　2009. Valuation We　believe　the　market　has　overreacted　due　to　the　overall　bearish sentiment.　Valuations　have　now　come　close　to　trough　levels,　trading　at　an average　9%　above　trough　EV/replacement　cost　and　0.9X-1.4X　P/B.　We maintain　our　2010E-2012E　earnings,　ratings　and　target　prices　on　Angang, Magang,　Baosteel　and　Wugang.　The　stocks　now　offer　41%-81%　potential upside　to　our　target　prices,　based　on　mid-cycle　EV/RPC　for　Angang,　midpoint between　trough　and　mid-cycle　for　the　others.　Risks　include　strongerthan- expected　impact　to　steel　demand　from　property　tightening.