Delong again!

• Ambitious plans afoot. We visited Delong last week following its 1Q07 results,
recent share consolidation and convertible bond issue. Management provided
updates on its capacity expansion as well as long-term goal of establishing itself
as a top-20 steel manufacturer in China by 2010. Armed with a war chest of
US$200m from its recent convertible bond issue, Delong is seeking acquisition
targets.
• New capacity on schedule. Delong’s available capacity was only 75% utilised in
1Q07 due to a month-long maintenance shutdown of its first production line. From
2Q07, Delong will have 2.4m mt of total capacity and an additional 0.6m mt by
4Q07. It aims to have 10m mt by 2010 via acquisitions and capacity upgrade.
• Industry consolidation favours Delong, as it is China’s second lowest-cost steel
producer with a production yield of 98.5%. Delong also leads by technical
efficiency and a superior product mix of higher-grade, wider-width and thinnergauge
products. Any consolidation would provide opportunities for Delong to
acquire inefficient plants at lower prices.
• Upgrade to Outperform from Neutral; target price increased to S$4.70. We
are upgrading our earnings forecasts by 15.6%, 46.4% and 133.8% for FY07-09 to
reflect Delong’s accelerated expansion. We upgrade the stock to Outperform with
a new target price of S$4.70 following our earnings upgrade (previously S$3.40,
adjusted for share consolidation). Our target represents a PEG of 0.25x over
FY07-10 and 11.3x CY08 P/E.