Steel Industry Analysis

China’s Supply-Side Reform Continues to Reduce Capacity, Resulting in Lower Supply Marginal Elasticity vs. 2017. SMM Expects China Crude-Steel Capacity to be 1.08 bn tons in 2018.

Recap of 2015 to 2017: The supply-side reform initiated by the government in 2016 has reduced China’s steel industry capacity by following measures. 1) Eliminated 115 million tons of illegal capacity of Ditiao steel (low quality steel produced by medium-frequency induction furnaces); 2) Reduced newly approved capacity; 3) Limited output through the environmental-protection policies; 4) Improved the concentration rate of China’s steel industry. SMM estimates the capacity of crude-steel is 1.09 billion tons in 2017, down 1.62% yoy. We expect capacity to be 1.08 billion tons in 2018, down 1.37% yoy, implying the falling elasticity of supply. SMM estimates the apparent consumption at 825 million tons in 2017, up 2.1% yoy. The elasticity of both supply and demand increases, lifting steel prices.

Chart 1：China’s Crude Steel Capacity Chart 2：China’s Crude Steel Output

mn ton % mn ton % 1,400 20% 900 12% 1,200 15% 800 10% 1,000 700 8% 10% 600 800 6% 5% 500 4% 600 400 0% 2% 400 300 200 0% 200 -5% 100 -2% 0 -10%

0 -4%

2012 2009 2010 2011 2013 2014 2015 2016 2017

2018E

2012 2010 2011 2013 2014 2015 2016 2017 capacity-LHS (mn ton) YoY-RHS (%) output-LHS (mn ton) YoY-RHS (%)

Source: NBS, SMM Source: NBS, SMM

1) Eliminated the illegal capacity of Ditiao steel. The planned capacity cut targets by MIIT were 45 and 50 million tons respectively for 2016 and 2017, while the actual capacity cuts were 65 and 50 million tons. 115 million tons of Ditiao steel capacity was cut in two years, though lower than SMM expectations.

Table 1：China Steel Capacity (mn ton) Year Pig Iron Crude Steel Converter Electric Furnace Ditiao Steel 2015 1,011 1,190 1,032 162 180 2016 972 1,112 986 130 138 2017 944 1,094 948 150 0 2018E 926 1,080 922 162 0 2018E Additions (18) (14) (26) 12 0

Source: MIIT, SMM

2) Reduced newly approved capacity. The 2016 capacity addition was 8.93 million tons for Baosteel's Zhanjiang project. In 2017, the capacity addition was 4.25 million tons for Shandong Steel’s 1st phase of Rizhao project. In 2018, the new additions will be Shougang’s 2nd phase of Jintang Project (phasing out 5.49 and 6.38 million tons of pig- iron and crude-steel capacity, while adding 4.39 and 5.1 million tons respectively, resulting net reductions of 1.1 and 1.28 million tons of pig-iron and crude-steel capacity). MIIT’s newly released industry guidelines require the supply-side reform of steel industry to focus on capacity reduction and swap going forward.

Chart 3：China Pig Iron Capacity Additions (mn ton)

80

70

60

50

40

30

20

10

0

2006 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 1992

Source：NBS, SMM

3) Limited output through the environmental-protection policies. SMM forecasts that the winter restriction policy will be routine in the future. According our channel checks, the actual capacity cuts in 2+26 cities is about 30 million tons, accounting for 2.75% of China’s total steel capacity, though far below the targeted 50% capacity limits. However, the winter restriction policy is likely to be routine, suppressing steel supply. The exit of medium-to- small-scaled steel producers will be accelerated and the industry concentration rate will be increased, as additional costs will be spent by non-compliant producers to meet the stricter environmental policy requirements and the coal-to-gas (CTG) transition projects.

Chart 4：Concentration Rate of China’s Top 10 Steel Producers (2015)

Hebei Iron & Steel Co Ltd 5.94% 4.04% Anshan Iron & Steel Group Corp 4.35% Baoshan Iron & Steel Co Ltd 3.21% Wuhan Iron & Steel Co Ltd 4.26% Jiangsu Shagang Co Ltd 3.55% Shougang Corp 2.70% Shandong Iron and Steel Co Ltd 2.35% Maanshan Iron & Steel 65.72% 2.02% Tianjin Bohai Runde Steel & Ir 1.86% Benxi Iron & Steel Group Co Lt Other

Source：SMM 4) Improved the concentration rate of China’s steel industry. The government requires that the concentration rate of 10-largest steel producers to be 60%-70% by 2025. There should be 3-4 producers with capacity of 80 million tons each, and 6-8 producers with capacity of 40 million tons each.

Supply additions: The supply additions in 2018 will mostly come from resumption of EAF, which are built after the suspension of the intermediate-frequency furnace. According to SMM survey, the net addition of EAF capacity in 2018 is about 12 million tons. The increase of EAF output will not change the downward trend of declining capacity, but the commission of capacity within the short period will add to the supply. Therefore, the profitability of EAF plants and the actual output increase from the commissioned capacity should be closely watched. Based on SMM model and calculations, EAF plants in East China enjoy gross profit of Rmb200-300/ton as of Jan 18, and some plants are break-even.

Chart 6： EAF Gross Profits (Rmb/ton)

6,000 1,400

5,000 1,200 1,000 4,000 800 3,000 600 2,000 400

1,000 200

0 0 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18

rebar prices (HRB400)-LHS EAF gross profits-RHS

Source：SMM

FAI in Construction Determines the Marginal Elasticity of Steel Demand, and SMM Forecasts China’s Apparent Consumption of Steel is 793 mn tons in 2018

SMM calculates that domestic steel apparent consumption rebounded in 2016 and 2017 to 792 and 793 million tons respectively, up 1.5% and 0.1% yoy. Construction (including housing construction and infrastructure) and machinery are major downstream sectors for China’s steel demand, accounting for 48.6% and 20.9% of China’s total steel demand in 2017, and determine the marginal elasticity of steel demand. SMM forecasts real estate demand will continue to improve in 2018 due to inventory replenishment and the increase of newly started floor space. However, infrastructure demand will slow down due to the strict approval of capital and PPP projects. SMM estimates the consumption of construction steel will be 398 million tons in 2018, up 3.3% yoy.

Chart 7： China Steel Real Consumption (2011-2020E)

860 10%

840 8% 6% 820 4% 800 2% 780 0%

760 -2% -4% 740 -6% 720 -8% 700 -10% 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E

real consumption-LHS (mn ton) YoY-RHS (%)

Source：SMM

Chart 8：China Steel Real Consumption Breakdown (By Sector)

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E

construction machinery auto appliance shipbuilding others

Source：SMM

Real Estate Demand to Stabilize in 2018 on Rising Land Supply and Inventory Replenishment

SMM forecasts real estate demand will be stable in 2018 and rise by 0.11% yoy. The Ministry of Housing and Urban-Rural Development announced the real estate guidelines in October 2016, which started to deleverage both personal mortgages and company debts. Floor space sold of commercial housing and revenue started to accelerate declining at the same time.

The cumulative inventory of commercial housing floor space was 596.06 million square meters by Nov 2017, down 14% yoy, as results of a 2-year destocking. SMM believes that the policy of credit contraction to real estate business remains amid the rising land supply. To collect cash timely after developing the project and selling is an effective way to ensure the cash flow of real estate developers. On the other hand, the cumulative growth rate of newly started gross floor area was 6.9% by Nov 2017. The newly started gross floor area continued to grow while inventory of commercial housing floor space declined, indicating the real demand for housing was not weak. The government increases supplies by developing shantytowns project (5.8 million units are planned for 2018, above the market expectation of 5 million units) and the rental housing market. Speculative demand is also limited by the government regulations.

Chart 9 ： Commercial Housing Sales Area Chart 10 ： Commercial Housing Sales Revenue (cumulative) (cumulative)

1,800 60 140 100 1,600 50 120 80 1,400 40 100 60 1,200 30 1,000 80 40 20 800 60 20 10 600 40 0 400 0 200 -10 20 -20

0 -20 0 -40 2010 2011 2012 2013 2014 2015 2016 2017 2010 2011 2012 2013 2014 2015 2016 2017 area-LHS (mn meter square) YoY-RHS (%) sales revenue-LHS (Rmb tn) YoY-RHS (%)

Source: NBS, SMM Source: NBS, SMM

Chart 41：Inventory of Commercial Housing ( Chart 15：Purchase of Land Area (cumulative)

800 50 500 70 450 60 700 40 400 50 600 40 30 350 500 30 300 20 20 400 250 10 10 200 300 0 0 150 200 -10 100 -20 100 -10 50 -30 0 -20 0 -40 2012 2013 2014 2015 2016 2017 2010 2011 2012 2013 2014 2015 2016 2017 area-LHS (mn square meters) YoY-RHS (%） land sales area-LHS (mn square meters) YoY-RHS (%)

Source: NBS, SMM Source: NBS, SMM

Chart 63 ： New Construction Housing Area Chart 14： Investments of Real Estate （cumulative） （cumulative）

2,500 80 160 80

140 70 60 2,000 60 120 40 50 1,500 100 40 20 80 30 1,000 60 0 20 40 500 10 -20 20 0

0 -40 0 (10) 2010 2011 2012 2013 2014 2015 2016 2017 2010 2011 2012 2013 2014 2015 2016 2017

area -LHS (mn square meters) YoY-RHS(%) investment capital-LHS (Rmb tn) YoY-RHS (%)

Source: NBS, SMM Source: NBS, SMM

Infrastructure FAI to Stabilize in 2018, and Financing to be more Strict

As a counter-cyclical measure of national economic control, infrastructure has been greatly affected by the fiscal policy. The adoption rate of new PPP projects decreased due to the stringent review of non-compliant credits. On the other hand, the upside potential is limited as the proportion of self-financing funds mainly based on local government’s debts increased from 44.8% in 2000 to 2016 66.69%, with the absolute value jumping 37.99 times. Therefore, SMM expects FAI growth in infrastructure will slow down in 2018, at a growth rate of 15% yoy, due to the tight capital.

Chart 75：No. of Audited PPP Projects Chart 16：PPP Project Total Investment（Rmb bn)

16,000 200,000 14,000 180,000 160,000 12,000 140,000 10,000 120,000 8,000 100,000 80,000 6,000 60,000 4,000 40,000 2,000 20,000 0

0

Jul-16 Jul-17

Jan-16 Jan-17

Sep-16 Sep-17

Mar-16 Mar-17

Jul-16 Jul-17

Nov-16

May-16 May-17

Jan-16 Jan-17

Sep-16 Sep-17

Mar-16 Mar-17

Nov-16 May-17 May-16 Source: NBS, SMM Source: NBS, SMM

Chart 17：Capital Source of Infrastructure Projects (2000-2016)

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

funds within the state budget domestic lending foreign investment self-raised funds others

Source：NBS, SMM

Chart 18：Investment of Infrastructure Construction （2004-2017，cumulative）

180 60%

160 50% 140 40% 120 100 30% 80 20% 60 10% 40 20 0% 0 -10% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

investment capital- LHS (Rmb tn) YoY-RHS (%)

Source：NBS, SMM

Juglar Cycle Continues, Growth of Machinery Demand Slows Down in 2018

Demand for construction machinery will increase on: 1) The operating rates of real estate and infrastructure increased. Newly started floor space in 2016 and 2017 rose by 8.1% and 6.9% respectively, indicating an improving downstream demand; 2) The needs from equipment replacement. The sales of excavators and loaders in China grew rapidly in 2007-2010 and reached the peak in 2011. Therefore, the machinery replacement needs will peak during 2017-2021 based on our assumption of 8-10 years depreciation period.

Chart 89：Sales Volume of Excavator （1999- Chart 90：Sales Volume of Loader （1999-2016） 2017）

250 100% 300 80% 80% 200 250 60% 60% 40% 40% 200 150 20% 20% 150 100 0% 0% 100 -20% -20% 50 50 -40% -40% 0 -60%

0 -60%

2001 2006 2011 2016 1999 2000 2002 2003 2004 2005 2007 2008 2009 2010 2012 2013 2014 2015

2006 1999 2000 2001 2002 2003 2004 2005 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 sales volume-LHS (000 units) YoY-RHS (%) sales volume-LHS (000 units) YoY-RHS (%)

Source: China Engineering Machinery Industry Source: China Engineering Machinery Industry Yearbook, Yearbook, SMM SMM

Positive Outlook on Auto in the Medium-to- Long-Term as China’s Car Ownership/Capita Rises

China cancelled the purchase tax on small-engine passenger vehicles at end-2017, pressuring the car sales in the short-term. A 5% car purchase tax was levied on a displacement of 1.6 liters or less from Oct 2015 to Dec 2016, and was 7.5% in 2017. A 10% statutory tax will be restored from Jan 2018.

Chart 21：Sales Volume of Domestic Auto （2011-2017, mn units）

4.0 60%

3.5 50% 40% 3.0 30% 2.5 20% 2.0 10%

1.5 0% -10% 1.0 -20% 0.5 -30% 0.0 -40% 2011 2012 2013 2014 2015 2016 2017 sales volume-LHS (mn units) YoY-RHS (%)

Source：NBS, SMM

However, the number of vehicles owned by a thousand people in China increased from 68 vehicles/thousand ppl in 2010 to 140 in 2016, representing an increase of 105.88%. During the same period, GDP per capita grew from $US31,000/capita to $US54,000/capita, an increase of 74.19%. According to the World Motor Organization data, China’s number of vehicles owned by thousand ppl was less than the world average in 2016. SMM believes auto sector will have pressuring sales volume in the short term due to the advanced overdraft sales. However, SMM is positive on the medium-to-long-term auto demand due to rising GDP per capita and car replacement needs.

Chart 22：GDP & Car Parc Chart 103：Car Parc Comparison

160 60,000 900 800 140 50,000 800 120 700 40,000 572 591 100 600 80 30,000 500 376 60 20,000 400 40 300 10,000 20 200 140 158 0 0 100

0

2014 2007 2008 2009 2010 2011 2012 2013 2015 2016 2006 China America German Janpan Korean Global car parc per thousand person-LHS average GDP-RHS (Rmb) Average

Source: NBS, SMM Source: OICA, SMM

Big Four Continue to Add Iron Ore Output, SMM Expects Prices to Trade at $65-70/ton in 2018

SMM estimates that the big 4 iron ore miners will continue to add output in 2018, up by about 50 million tons with mainly medium-to-high grades. The average iron ore price in 2018 will fall to $65-70/ton on rising supply. In China, blast furnace steel capacity still dominates, while EAF capacity only accounts for 13.71%. China sources about 85% of iron ore requirements through imports, vs. the remaining 15% within the country. Supplies from the big four continue to rise in 2018. Vale’s SIID project will add 20-40 million tons this year and Rio Tinto’s Silvergrass project will add 10 million tons in 2018. Roy Hill will commission its 55 million tons capacity.

Chart 24：Total Iron Ore Shipment of Big 4 (2010-2018E)

12,000 16% 14% 10,000 12% 8,000 10% 6,000 8% 6% 4,000 4% 2,000 2% 0 0% 2010 2011 2012 2013 2014 2015 2016 2017E 2018E Rio Tinto-LHS BHPB-LHS FMG-LHS Vale-LHS total shipment YOY-RHS (%)

Source：SMM

Scrap Steel Price Will Increase on EAF Capacity Release

Some previously banned capacity of intermediate-frequency furnace will covert to EAF, and will resume in 1H. According to SMM survey, the newly-added EAF capacity is estimated at 11.8 million tons in 2018, driving up scrap steel prices. SMM believes scrap steel price will be stronger than iron ore but weaker than steel in 2018.

Chart 25：China’s EAF Capacity Additions, by Province (000 tonne)

Source：SMM

Chart 26： Scrap Steel Prices (2010-2018E)

4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source：SMM

SMM Expects Steel Price to Move Downward but GP/ton of Steel to Maintain in 2018. Steelmakers Will Maintain their Profitability.

Overall, SMM expects weak marginal flexibility between supply and demand in 2018. Supply will be cut by 14 million tons yoy, down 22.15% from the reduction in 2017, given the rising output from the new EAF capacity. In the short term, SMM is optimistic about the mismatch of supply and demand due to the winter stocking and resumption of production in spring. The winter restriction will ends on Mar 15, and steel mills will resume production at the beginning of March, resulting a half-month supply shock. SMM forecasts the gross profit/ton of steel at Rmb600-800/ton in 2018, and steel mills are able to maintain their profitability.

Table 2： China Steel Consumption Breakdown (2013-2020E, mn ton) Year 2013 2014 2015 2016 2017E 2018E 2019E 2020E Construction 489 442 384 370 385 398 400 395 Machinery 170 166 158 159 166 164 163 164 Automobile 43 44 39 43 48 49 49 49 Home Appliance 13 13 13 14 16 17 18 19 Shipbuilding 15 13 14 12 13 10 9 9 Others 114 144 152 183 165 155 155 150 Total Steel Consumption (mn ton) 844 822 761 780 792 793 795 787 Total Steel Consumption YOY (%) 7.6% -2.7% -7.4% 2.6% 1.5% 0.1% 0.2% -1.0%

Source: SMM

Company Analysis

Company Name Rating

Baosteel

Hesteel

Angang Steel

Baosteel, Hesteel and Angang Steel are all integrated steel producers listed in China, with products focusing on high-quality plate. Steel business is the largest contributor to their revenue and profits. However, each of them has its own advantages.

Baosteel, Hesteel and Angang are leading steel producers in China. The flat steel capacity is 42.4, 19.4 and 8.26 million tons for Baosteel, Hesteel and Angang as of end-2017 respectively, including 19.5, 8.95 and 4.2 million tons of CRC capacity.

Table 3：Capacity Comparisons in 2017 (000 tonne) Company Name Baosteel Group Hesteel Group Angang Group Pig Iron (parentco level) 67,300 33,230 24,000 Crude Steel (parentco) 60,800 39,200 25,200 Rebar 4,900 5,690 0 Wire Rod 4,300 2,200 1,550 Section Steel 0 550 2,700 Medium Plate 5,000 3,400 4,400 HRC 42,400 19,400 8,260 Hot Rolled Strip 1,200 2,400 0 CRC 19,500 8,950 4,200 Galvanizing plate 8,930 3,440 1,900 Tube 2,100 0 460 Silicon Steel 2,400 0 900 Stainless Steel 0 600 0

Source：SMM

After the Baosteel-Wugang merger in 2016, Baosteel is now the largest flat-steel producer in China. SMM sees the most upside potential from Baosteel among above three companies.

1) Further profit-making from Zhanjiang. Baosteel’s Zhanjiang project, completed in 2016, is expected to add 8.75 million tons capacity for Baosteel. Its cold-rolled production line was commissioned at end-2017 and will ramp up to full capacity in 2018, adding 25.5 million tons of CRC capacity for Baosteel. Zhangjiang project has geographical advantages, as its location is close to both the South China customers and the port of importing raw materials. It also has cost advantages, with net profit in 1H17 at Rmb308/ton, second only to the Baosteel headquarter base. SMM believes the Zhanjiang project will further lift Baosteel’s profits once its CRC capacity fully ramps up.

2) Synergy from the Baowu merger. Synergy was obvious in terms of integrated procurement and sales In 2017, the first year of the merger. Wisco is expected to serve as an independent production base but follow the adjustment of production lines and systematic management from the headquarter, further driving up its profits.

3) Profitability of Baosteel to increase. Auto and processing are two major downstream sectors for Baosteel, accounting for about 40% of its total sales. The strict requirements of steel-products quality and long time needed to get the customer certification are specific for plate products. Once the supply relationship is set, the supplier is not easily replaced. Based on this, Baosteel actively develops direct-supply business model, providing complete supply chain services to increase customers’ stickiness and expand its market shares.

Chart 27：Baosteel Revenue Breakdown (Rmb mn) Chart 118：Baosteel Gross Margin Breakdown

100% 45,000 120% 90% 40,000 100% 80% 35,000 80% 70% 30,000 60% 60% 25,000 50% 20,000 40%

40% 15,000 20% 30% 10,000 0% 20% 5,000 -20% 10% 0 2013 2014 2015 2016E 2017E 2018E 2019E 0% -5,000 -40% 2013 2014 2015 2016E 2017E 2018E 2019E HRC CRC Tube Plate HRC CRC Tube Plate Other Long Product Other Long Product Gross Margin YOY-RHS (%) Source: SMM Source: SMM

Table 4：Baosteel Market Share (%) Product Name 2013 2014 2015 2016 CRC Car Plate 50% 50% 50% 50% Tin Plate 22.4% 21.2% 23.6% 20.2%

Non-Oriented Electrical Steel 13.8% 17% 14.3% 24%

Non-Standard Oil Pipe 27.5% 28% 30% 30% Source：Company Report, SMM

Angang Steel posted net profit of Rmb2.39 billion in 4Q17, up 63% from 3Q17. Its net profit was Rmb215/ton in 3Q17, up from Rmb79/ton in 2016. But its PE was at 12.68x and PB at 1.04x, the lowest among these three companies.

Hesteel has benefited the consolidation of the steel industry in Hebei, the province where it locates. Tangshan Steel and Handan Steel were injected to Hesteel during 2010-15, and more asset injections are expected going forwards.

Chart 29：Hesteel Revenue Breakdown (Rmb mn) Chart 30：Hesteel Gross Margin Breakdown

100% 14,000 30% 90% 25% 12,000 80% 20% 70% 10,000 15% 60% 8,000 10% 50% 5% 40% 6,000 0% 30% 4,000 20% -5% 2,000 10% -10% 0% 0 -15% 2013 2014 2015 2016E 2017E 2018E 2019E 2013 2014 2015 2016 2017E2018E2019E Other Steel Product Steel Product Steel Product Billet Billet Vanadium products Vanadium products Other Steel Product Gross Margin YoY-RHS (%)

Source: SMM Source: SMM

Chart 31 ： Angang Steel Revenue Breakdown Chart 312 ： Angang Steel Gross Margin (Rmb mn) Breakdown

100% 14,000 350% 90% 12,000 300% 80% 10,000 250% 70% 200% 60% 8,000 150% 50% 6,000 100% 40% 4,000 50% 30% 2,000 20% 0% 10% 0 -50% 2013 2014 2015 2016 2017E 2018E 2019E 0% -2,000 -100% 2013 2014 2015 2016 2017E 2018E 2019E Other Steel Product Plate CRC HRC HRC CRC Plate Other Steel Product Gross Margin YoY-RHS (%)

Source: SMM Source: SMM

Financial Data Comparison and Forecast

Chart 33：Baosteel Revenue Chart 34：Baosteel Net Income

400,000 100% 30,000 1400% 350,000 1200% 80% 25,000 300,000 1000% 60% 20,000 800% 250,000 600% 200,000 40% 15,000 400% 150,000 20% 10,000 200% 100,000 0% 0% 5,000 50,000 -200%

0 -20% 0 -400% 2013 2014 2015 2016 2017E2018E2019E 2013 2014 2015 2016 2017E2018E2019E Net Income-LHS YoY-RHS (%) Revenue-LHS YoY-RHS (%)

Source: SMM Source: SMM

Chart 35：Angang Steel Revenue Chart 36：Angang Steel Net Income

90,000 60% 8,000 400% 80,000 50% 300% 6,000 200% 70,000 40% 30% 4,000 100% 60,000 20% 0% 50,000 2,000 10% -100% 40,000 0% 0 -200% 30,000 2013 2014 2015 2016 2017E2018E2019E -10% -300% -2,000 20,000 -20% -400% 10,000 -500% -30% -4,000 0 -40% -600% 2013 2014 2015 2016 2017E 2018E 2019E -6,000 -700% Revenue-LHS YoY-RHS (%) Net Income-LHS YoY-RHS (%)

Source: SMM Source: SMM

Chart 37：Hesteel Revenue Chart 38：Hesteel Net Income

120,000 40% 3,500 500% 30% 100,000 3,000 400%

20% 2,500 80,000 300% 10% 2,000 60,000 200% 0% 1,500 40,000 100% -10% 1,000 0% 20,000 -20% 500

0 -30% 0 -100% 2013 2014 2015 2016 2017E 2018E 2019E 2013 2014 2015 2016 2017E 2018E 2019E

Revenue-LHS YoY-RHS (%) Net Income-LHS YoY-RHS (%)

Source: SMM Source: SMM

Table 4：Key Ratio Comparisons (Rmb, mn) Baosteel Angang Steel Hesteel

Revenue 185,710 57,882 74,551

Net Income 9,205 1,571 1,430 2016 Output (000 tonne) 24,080 19,943 27,860

Unit Net Income 382 79 51 (Rmb/ton)

Revenue 252,140 60,506 86,906

Net Income 12,520 3,297 2,330

Q317 Expected Output 34,216 15,347 19,577 (000 tonne) Unit Net Income 366 215 119 (Rmb/ton)

PE(TTM) 13.65 12.68 15.30 (As of Jan 18, 2018) PB(LF) 1.30 1.04 0.93

Source: SMM

Key Assumption

Table 5：Baosteel Key Ratio Sales Volume (000 tonne) 2013 2014 2015 2,016 2017E 2018E 2019E HRC 8,099 8,174 8,840 10,040 20,370 20,661 20,952 CRC 9,445 9,704 9,450 9,730 16,717 16,965 17,160 Plate 1,278 1,169 1,850 2,318 0 0 0 ASP (Rmb/ton) 2013 2014 2015 2,016 2017E 2018E 2019E HRC 3,867 3,525 2,595 2,848 3,827 3,521 3,697 CRC 5,387 5,294 4,408 4,423 5,365 5,321 5,497 Unit Cost (Rmb/ton) 2013 2014 2015 2,016 2017E 2018E 2019E HRC 3,289 2,992 2,292 2,217 3,065 2,758 2,841 CRC 4,603 4,533 3,777 3,404 4,365 4,058 4,141 Earnings 2013 2014 2015 2,016 2017E 2018E 2019E Net Earnings (Rmb mn) 6,040 6,091 714 9,205 19,840 22,392 25,479 EPS (Rmb) 0.35 0.35 0.06 0.55 0.85 0.96 1.10 Source：SMM

Table 6：Angang Steel Key Ratio Sales Volume (000 tonne) 2013 2014 2015 2,016 2017E 2018E 2019E HRC 7,958 8,540 7,730 7,610 7,143 7,143 7,143 CRC 6,217 6,190 5,950 6,540 7,188 7,188 7,188 Plate 2,488 3,070 3,140 3,250 3,373 3,373 3,373 ASP (Rmb/ton) 2013 2014 2015 2,016 2017E 2018E 2019E HRC 3,301 2,990 2,103 2,357 3,718 3,421 3,592 CRC 4,261 4,037 3,025 3,185 4,140 4,036 4,170 Unit Cost (Rmb/ton) 2013 2014 2015 2,016 2017E 2018E 2019E HRC 3,159 2,804 2,107 2,223 3,073 2,811 2,924 CRC 61,696 62,741 49,205 39,525 85,130 89,387 93,856 Earnings 2013 2014 2015 2,016 2017E 2018E 2019E Net Earnings (Rmb mn) 755 924 -4,600 1,571 5,655 5,977 5,911 EPS (Rmb) 0.11 0.13 (0.63) 0.22 0.78 0.82 0.81 Source：SMM

Table 7：Hesteel Key Ratio Sales Volume (000 tonne) 2013 2014 2015 2,016 2017E 2018E 2019E HRC 9,923 10,305 10,128 9,649 9,418 9,418 9,418 CRC 8,497 8,825 8,672 8,263 8,065 8,065 8,065 Vanadium & Titanium 14 11 10 12 12 12 12 Products ASP (Rmb/ton) 2013 2014 2015 2,016 2017E 2018E 2019E Steel Product 3,477 3,174 2,452 2,596 3,557 3,272 3,393 Vanadium & Titanium 75,141 74,700 53,007 48,523 101,898 106,993 112,343 Products Unit Cost (Rmb/ton) 2013 2014 2015 2,016 2017E 2018E 2019E Steel Product 3,159 2,804 2,107 2,223 3,073 2,811 2,924 Vanadium & Titanium 61,696 62,741 49,205 39,525 85,130 89,387 93,856 Products Earnings 2013 2014 2015 2,016 2017E 2018E 2019E Net Earnings (Rmb mn) 137 717 402 1,430 2,810 3,273 3,322 EPS (Rmb) 0.01 0.07 0.05 0.15 0.25 0.30 0.30 Source：SMM

2018.2.1