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Sentiment to improve as output cuts

take effect and steel prices stabilise

High costs, softer demand to challenge

3Q but medium-term outlook still robustSector oversold: POSCO top pick and

HSBC Asia Super 10 ideaSeasonally weaker 3Q season approaches but prices

bottoming. Underlying demand has remained resilient but

sentiment has been affected by Chinas property clampdown

and European debt concerns. In turn, inventory liquidation and

consumers sitting on their hands have pushed prices down. In

our view, these concerns have been overplayed and we believe

steel prices may soon stabilise given that prices are now below

the cost of marginal production, which should trigger supply

cuts over the coming months. Meanwhile inventories remain at

normal levels. Over the coming years, we stick to our view that

Asia should remain tightly balanced, shift into a net importer

position and operate at near full capacity. These conditions have

historically corresponded with higher profit margins.

3Q margin squeeze likely lowering 2010 forecasts. With

spot Asian HRC steel prices having corrected 12% (USD85/t)

since recent highs, 3Q has begun weaker than our expectations.

For 2010, we reduce steel price forecasts by 5%, leading to

average EPS downgrades of 13% in 2010 but largely maintain

2011 forecasts. Against consensus, our revisions place us 7%

below 2010 but 9% ahead of 2011 estimates.

Valuations below trend, now cheaper to buy than build. We

believethe market is pricing in an unlikely bearish scenario

with implied ROEs below historical trend, and regional

valuations (EV/t of USD931) are now below replacement cost

(USD1,036/t). We remain attracted to Indian names that offer

highest raw material self-sufficiency (SAIL is our top pick in

India). In our view, Chinese steel stocks are oversold.

Catalysts steel prices to bottom. We believe the key near-

term catalyst is a bottoming in steel prices. Upcoming 2Q

earnings should be solid but this is largely priced in; 3Q outlook

statements will likely be cautious given recent price cuts. This

should prove to be the bottom as we expect recovery in steel

prices in 4Q as cost pressures ease.

Global Natural Resources

Asia Metals & Mining

Asia Steel3Q to signal bottom

HSBC Asia Steel sector ratings and target prices

Company Code Ccy Last New Prev Potl Ratingprice TP TP rtn (unchg)

POSCO 005490 KRW 472,000 600,000 650,000 30% OW (V)Nippon Steel 5401 JPY 318 360 360 14% N (V)JFE Holdings 5411 JPY 2,986 3,350 3,600 15% N (V)Baosteel 600019 RMB 6.13 8.00 9.00 34% OW (V)Angang A 000898 RMB 7.76 9.50 11.50 26% OW (V)Angang H 347 HKD 9.91 12.00 15.00 25% OW (V)

Maanshan A 600808 RMB 3.46 4.50 5.50 33% OW (V)Maanshan H 323 HKD 3.53 4.50 6.00 31% OW (V)China Steel 2002 TWD 30.70 37.00 42.00 29% OW (V)SAIL SAIL INR 198 256 272 31% OW (V)Tata Steel TATA INR 486 562 690 17% N (V)JSW Steel JSTL INR 1057 1,280 1,460 22% OW (V)BlueScope BSL AUD 2.35 3.00 3.50 29% OW (V)

OW = Overweight, N = Neutral, UW = Underweight; V = Volatile (see disclosure appendix)Source: Bloomberg, HSBC. Prices as at close of 16 June 2010

18 June 2010

Daniel Kang *

Regional Head of Metals & Mining, Asia-Pacific

The Hongkong and Shanghai Banking Corporation Limited

+852 2996 6669 [email protected]

Jatin Kotian *

Analyst

HSBC Securities and Capital Markets (India) Private Limited


Sarah Mak *

Analyst


+852 28224551 [email protected]

Lun Zhang*Analyst



Amit Pansari*, CFA

Associate, Bangalore

View HSBC Global Research at: http://www.research.hsbc.com*Employed by a non-US affiliate of HSBC Securities (USA) Inc,and is not registered/qualified pursuant to FINRA regulations

Issuer of report: The Hongkong and Shanghai BankingCorporation Limited

Disclaimer & DisclosuresThis report must be read with thedisclosures and the analyst certificationsin the Disclosure appendix, and with theDisclaimer, which forms part of it
mailto:[email protected]://www.research.hsbc.com/http://www.research.hsbc.com/http://www.research.hsbc.com/mailto:[email protected]

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Valuation and key changesHSBC Asia Steel valuation summary (calendar year-end)

Stock Rating Ccy Share Target Mkt cap _____PE (x) _____ __ EV/EBITDA (x)__ ____ PB (x)______ ___ Div yield ____price price USDm 2010e 2011e 2010e 2011e 2010e 2011e 2010e 2011e

POSCO OW (V) KRW 472,000 600,000 29,002 7.3 5.8 4.5 3.2 1.0 0.9 2.7% 3.4%Nippon Steel N (V) JPY 318 360 23,620 19.5 10.4 9.6 7.4 1.1 1.0 1.1% 2.0%JFE Holdings N (V) JPY 2,986 3,350 20,020 11.6 8.4 7.2 6.1 1.0 0.9 2.0% 2.7%Baosteel OW (V) RMB 6.13 8.00 15,712 11.8 8.6 4.6 3.8 1.1 1.0 3.3% 5.2%Angang - A OW (V) RMB 7.76 9.50 6,984 13.0 6.6 6.8 4.5 1.0 0.9 3.9% 7.6%Angang - H OW (V) HKD 9.91 12.00 1,381 14.6 7.3 6.8 4.5 1.1 1.0 3.5% 6.8%Maanshan - A OW (V) RMB 3.46 4.50 3,022 10.9 6.8 3.9 2.9 0.9 0.8 3.2% 5.2%Maanshan - H OW (V) HKD 3.53 4.50 785 9.8 6.1 3.9 2.9 0.8 0.8 3.6% 5.8%China Steel OW (V) TWD 30.70 37.00 12,404 10.5 8.1 8.7 6.9 1.5 1.4 8.1% 10.6%

SAIL OW (V) INR 198 256 17,480 11.5 9.0 6.1 5.0 2.2 1.8 1.5% 1.6%Tata Steel N (V) INR 486 562 9,210 14.1 7.6 6.2 5.2 1.2 1.1 1.4% 2.4%JSW Steel OW (V) INR 1,057 1,280 4,228 11.5 7.9 8.0 5.8 1.9 1.6 1.2% 1.9%BlueScope OW (V) AUD 2.35 3.00 3,702 16.5 6.4 5.9 4.2 0.7 0.7 3.0% 8.1%Asia Steel Sector 147,549 12.3 8.0 6.6 5.1 1.2 1.1 2.7% 4.0%

Source: HSBC estimates; Prices as of close 16 June 2010, OW = Overweight, N = Neutral, UW = Underweight; V = Volatile (see disclosure appendix)

HSBC vs Consensus net profit estimates

Year end Code Unit _________ HSBC__________ __Bloomberg Consensus __ __ HSBC vs Consensus____2010e 2011e 2010e 2011e 2010e 2011e

POSCO Dec 005490.KS RMBm 4,929 6,204 5,061 5,255 -3% 18%Nippon Steel Mar 5401.T JPYm 146 218 186 225 -21% -3%JFE Holdings Mar 5411.T JPYm 166 195 181 206 -9% -5%Baosteel Dec 600019.SS RMBm 9,079 12,491 10,126 12,003 -10% 4%Angang Dec 0347.HK RMBm 4,304 8,561 5,201 6,570 -17% 30%Maanshan Dec 0323.HK RMBm 2,445 3,916 2,089 2,872 17% 36%China Steel Corp Dec 2002.TW TWDm 37,666 49,111 36,719 38,408 3% 28%SAIL Mar SAIL.BO INRm 72,478 97,204 83,043 94,557 -13% 3%Tata Steel Mar TISC.BO INRm 47,538 59,235 56,491 73,245 -16% -19%JSW Steel Mar JSTL.BO INRm 17,758 27,346 20,596 31,550 -14% -13%Bluescope Jun BSL.AX AUDm 93 465 85 376 9% 23%

Source: HSBC estimates, Bloomberg; Note: For JFE, Nippon Steel, JSW Steel, SAIL and Tata Steel, 2010e represents March 2011.

HSBC Asia Steel Earnings and commodity price revisions

_______________ New ______________ _____________% revision _____________ ______________y-o-y % _____________Net profit Unit 2010e 2011e 2012e 2010e 2011e 2012e 2010e 2011e 2012e

POSCO KRWbn 4,929 6,204 7,396 -10% 0% 5% 55% 26% 19%

Nippon Steel JPYbn 146 218 240 -10% -2% -2% nm 49% 10%JFE Holdings JPYbn 166 195 202 -9% -2% -1% 263% 18% 4%Baosteel RMBm 9,079 12,491 12,896 -24% -5% -6% 56% 38% 3%Angang HKDm 4,304 8,561 8,461 -30% -6% -16% 472% 99% -1%Maanshan HKDm 2,445 3,916 5,887 -29% -1% 0% 523% 60% 50%China Steel TWDm 37,666 49,111 55,289 -11% 5% -17% 93% 30% 13%SAIL INRm 72,478 97,204 na -11% -5% na 9% 34% naTata Steel INRm 47,538 59,235 na -4% -11% na 337% 25% naJSW Steel INRm 17,758 27,346 29,397 -8% -14% na 14% 54% 8%BlueScope AUDm 93 465 548 -1% 16% 1% 66% 400% 18%Commodity forecastsHRC - Asia USD/t 652 713 670 -5% 0% 0% 33% 9% -6%HRC - China USD/t 647 695 668 -3% 0% 0% 23% 7% -4%Rebar - Asia USD/t 615 676 635 -5% 0% 0% 23% 10% -6%Rebar - China USD/t 627 675 648 -3% 0% 0% 19% 8% -4%Iron ore - Fines (fob) USD/t 112 92 74 10% 0% 0% 81% -18% -20%

Coking coal USD/t 231 250 160 -3% 0% 0% 79% 8% -36%Source: HSBC estimates; Note: For JFE and Nippon Steel, SAIL, Tata Steel and J SW Steel, 2010e represents March 2011.

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The Asian Steel sector has been a major casualty

of market risk aversion in 1H10. Stocks under our

coverage have fallen by 25% ytd on average (China

stocks faring worse, down 40%). While sentiment

may remain weak in the near term, we believe steel

prices may soon bottom given prices are now below

costs, which should trigger increasing production

cuts. We stick to our medium-term view that Asia

should remain tightly balanced, shift into a net

importer position and operate at near full capacity.

With valuations now below trend levels and

replacement costs, we reiterate our bullish stance

on Asia Steel.

HSBC Asia Steel coverage ytd price performance

-52%-42%

-38%

-37%

-31%

-27%

-24%-22%

-21%

-17%

-16%

-7%5%

Angang A

Angang H

Maanshan H

Baosteel

Maanshan A

Bluescope

POSCOJFE

Tata Steel

NSC

SAIL

China Steel

JSW Steel

Source: HSBC, Datastream

Near-term headwinds remain in place and 3Q

looks set for a margin squeeze. Recent falls in

Asian steel prices and lower than expected July

contract prices have caused us to reduce 2010

steel price forecasts by 5%. In addition,

notwithstanding lower iron ore and coal prices in

recent months, the current quarterly contract

pricing system (based on three-month spot lag)

suggests an increase in 3Q raw material contract

prices. Combined with the traditional 3Q weaker

demand season approaching, we lower sector EPS

by an average of 13% in 2010, placing us 7%

below consensus estimates.

That said, we believe 3Q will mark the bottom for

profits as prices are now below cash costs of

production which has triggered production cuts. We

believe inventories remain at normal levels. In

addition, whilst seasonality will impact 3Q demand,

it should also assist demand recovery in 4Q.

With current valuations implying below trend

ROE in addition to replacement costs, we believe

the sector has been oversold. Within our coverage

universe, POSCO continues to rank best in our

sector scorecard.

3Q to signal bottom

Sentiment to improve on 3Q output cuts and prices stabilise

3Q margin squeeze under way, reduce sector EPS by 5%

Sector correction overdone reiterate OW stance on Asia Steel

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Supply cuts under wayWith current domestic Chinese HRC spot prices at

RMB4,200, we believe the majority of Chinese

capacity is now operating in losses. This should

trigger supply cuts from producers, which we

believe is under way. According to World Steel

Dynamics (WSD), average HRC production cash

cost in China (with VAT) is RMB4,250/t.

China average HRC production cost (RMB/t)

RMB/t

Iron ore 1,775Coking coal 704Scrap 205Energy 591Labour 184Freight 327Others 464Total 4,250

Source: World Steel Dynamics

A slowdown in production rate is already evident in

Chinas May crude steel production numbers. Crude

steel output in China slowed down to 1.81mtpd in

May from the record 1.85mtpd run-rate achieved in

April 2010. According to CISA production rates

continued to slow down from 1.85mtpd in the first

10 days to 1.80mtpd in the next 10 days and further

to 1.78mtpd in the last 10 days of May.

China average daily crude steel production rates (mtpd)

1.30

1.40

1.50

1.60

1.70

1.80

1.90

Jan-09

Feb-09

Mar-09

Apr-09

May-09

Jun-09

Jul-09

Aug-09

Sep-09

Oct-09

Nov-09

Dec-09

Jan-10

Feb-10

Mar-10

Apr-10

May-10

Source: HSBC, NBS, CISA

We believe that the falling steel prices since early

May have resulted in losses for small scale marginal

producers who purchase on spot and has led to

production cuts by these mills. We expect further

production cuts from the small mills in the near term

as they continue to make losses at current prices.

According to China Securities Journal rolling mills

in northern China are estimated to be running at less

than 50% of capacity.

China marginal producers profitability at spot steel and rawmaterial prices (ex-VAT)

RMB/t

Iron ore 1,627Coking coal 942Rolling 1,000Transport 135Cost 3,704HRC price 3,573Profit/ (loss) -132

Source: HSBC, SBB, Bloomberg

Further, with the weakness in steel prices but still

high raw material contract prices we believe the

larger steel mills will face margin squeeze in 3Q

and will be forced to reduce output. Baosteel

Chairman Xu Lejiang has been quoted byMetal

Bulletin saying that Chinese steelmakers will cutproduction or bring forward maintenance in 3Q on

weak demand.

Steel traders in China expect large producers to start

maintenance from July as the mills cannot afford to

bear high costs during a seasonally weak 3Q.

Furthermore, they note that producers have not yet

started to cut output as traders now bear the losses

instead of producers. However, if spot market prices

continue to fall, steelmakers will have to refund

traders in the end and will have to bear the loss

which will force them to cut output.

According to WSD, average HRC production cash

cost in the World ex-China is USD647/t. With

current Asian HRC spot prices at cUSD625/t

more than 50% of the capacity is under losses. We

believe this will trigger a supply response from

the regional producers.

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World exChina average HRC production cost (USD/t)

USD/t

Iron ore 205Coking coal 114Scrap 56Energy 76Labour 68Freight 60Others 68Total 647

Source: World Steel Dynamics

Outside China also mills have hinted at reducing

output give weak market conditions. POSCO has

already announced that it will be undertaking a

scheduled relining of its No 4 blast furnace with a

capacity of 3.2mtpa in Pohang during July-

September which will reduce 3Q crude steel

production by c200-300kt. Similarly Koreas

Hyundai Steel has announced that it will reduce

output in 3Q due to regular maintenance work

which will last for around two weeks. SBB

estimates that this will reduce Hyundai Steels 3Q

output by 20% q-o-q. Dongkuk Steel has planned

maintenance shutdown for its rolling mills in 3Q.

Demand seasonality 3Qpain before 4Q gain

As detailed in our China Metals & Mining Monitor

The eye of the tigerdated 26 February 2010, we

note that 2Q has traditionally been the strongest for

metal demand in China as indicated by the robust

pick-up in end user activities across construction,

transport, power, consumer goods and other

manufacturing sectors. We have observed that there

is a strong sequential pick-up in demand from these

sectors in 2Q with average growth of 33% over

2006-09 while demand slows down in 3Q before

bouncing back again in 4Q. For 2010 we have

observed a similar pattern with demand in 1Q

declining 13% q-o-q on average. Using the April-

May run rate for the end user activities we estimate

sequential growth of 22% in 2Q.

This corresponds to the demand for finished steel

where it has grown by an average 14% in 2Q over

2006-09. Based on the demand run rate in April-

May we estimate sequential finished steel

consumption growth of 10% in 2Q.

Average q-o-q growth for end user and apparent crude steelconsumption in 2006-09 vs 2010

_ Average 2006-2009___ _______ 2010_________

Apparentcrude steel

demand

End userdemand

Finishedsteel

End user

1Q 2% -12.2% -2% -13.3%2Q 14% 32.7% *10% *22.3%3Q -2% -3.1%4Q 2% 25.4%

Source: HSBC estimates, CEIC, *Note: 2Q10 is estimated based on Apr-May run rate

Steel prices to stabilise

With prices below cash costs of production and

supply cuts under way, we believe steel prices

should soon bottom. We track Chinese steel mills

and traders expectations of a likely price hike (as

per a weekly survey by Mysteel, a Chinese steel

industry source) with steel prices. We can see that

while price hike expectations reached 'trough' levels

in early June (less than 10% of those surveyed

expect a weekly price hike), there has been a

stabilisation and slight upturn in recent weeks.

Mysteel survey of steel traders and steel mill

0%

10%

20%

30%

40%50%

60%

70%

Jan-10

Feb-10

Mar-10

Apr-10

May-10

Jun-10

3,600

3,750

3,900

4,050

4,2004,350

4,500

4,650

HRC P rices - RMB/ t (RHS) Hike (LHS )

Source: Mysteel
http://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=17kvc47iqf&n=261189.PDFhttp://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=17kvc47iqf&n=261189.PDFhttp://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=17kvc47iqf&n=261189.PDFhttp://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=17kvc47iqf&n=261189.PDF

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Oversold Valuations belowtrend and replacement costs

In our view, recent market concerns over China

property clampdown and the European crisis have

been overplayed.

As detailed in our China Metals & Mining Monitor

Property crackdown in focusdated 6 May 2010 we

believe there is little evidence thus far to suggest that

property sector demand has slowed in China. Year to

May, domestic construction completions were up

18% yoy while construction starts were up 72% yoy.

Given the 18-24-month construction period for

typical projects, we believe underlying construction

demand will remain firm (albeit slowing). The

governments roll-out of affordable housing should

also provide some offset to lower private investment.

With respect to Europe, as detailed in our China

Metals & Mining Monitor From overheating to

slowdown fearsdated 4 June, we see that Europeonly accounted for 14% of 2009 global steel

demand compared to Chinas 46%. We do not

believe a European slowdown will have a major

impact on global steel consumption. Our scenario

analysis suggests that if European demand growth

falls flat versus our base case of 24% in 2010,

then this will reduce our global demand forecast

by just 3% to 1.23bt.

Valuations below replacement costs

Valuations (EV/t) for the stocks under our

coverage have fallen by an average 22% from the

current year peak of USD1,200/t in January to

USD931/t at present and are below the eight-year

average of USD950/t. We believe the market is

now discounting an unlikely bearish scenario with

current valuation (EV/t USD931) below

replacement cost of new capacity (capex

USD1,036/t).

Asia Steel EV/t of capacity

400

600

800

1,000

1,200

1,400

1,600

May-03

May-04

May-05

May-06

May-07

May-08

May-09

May-10

USD/t

Average USD950/t Spot USD931/t

Source: Bloomberg

Asia Steel companies EV/t of capacity

EV/t of Capacity (USD/t)

POSCO 826Nippon Steel 1155JFE Holdings 1040Baosteel 794Angang - A 641Angang - H 641Maanshan - A 335Maanshan - H 335China Steel 1096SAIL 1134Tata Steel 689JSW Steel 1098Bluescope 634Average 931

Source: HSBC

New capacity costs

Company Project Country ProjectType

Capacity(mtpa)

Capex(USDbn)

Capex/t(USD)

China Steel Dragon steelBF #2

Taiwan Greenfield 2.5 2.8 1,139

China Steel Dragon steelBF #1

Taiwan Greenfield 2.5 2.5 1,000

Angang Bayuquan China Greenfield 5.0 4.2 848Hyundai Steel BF #1 and #2 Korea Greenfield 4.0 4.7 1,168Baostee l Zhanjiang China Brownfie ld 5.0 5.1 1,026Average 1,036

Source: HSBC
http://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=kjkt5tq5h8&n=266824.PDFhttp://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=kjkt5tq5h8&n=266824.PDFhttp://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=kjkt5tq5h8&n=266824.PDFhttp://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=lmyuazyu2b&n=269448.PDFhttp://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=lmyuazyu2b&n=269448.PDFhttp://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=lmyuazyu2b&n=269448.PDFhttp://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=lmyuazyu2b&n=269448.PDFhttp://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=lmyuazyu2b&n=269448.PDFhttp://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=lmyuazyu2b&n=269448.PDFhttp://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=lmyuazyu2b&n=269448.PDFhttp://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=kjkt5tq5h8&n=266824.PDFhttp://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=kjkt5tq5h8&n=266824.PDF

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2010 quarterly forecasts

We estimate 3Q to be the trough for earnings for

companies under our coverage as they are hit by a

double whammy of rising raw material costs and

weak steel prices. We expect margins to rebound in

4Q as both factors turn around and increasing steel

prices are accompanied by lower raw material costs.

Asia steel companies quarterly NPAT forecasts

Company Unit Mar 10 Jun 10 Sep 10 Dec 10

POSCO KRW bn 1,437 1,406 992 1,093Nippon Steel JPY bn 34 44 25 41JFE JPY bn 47 53 27 47Baosteel RMB mn 3,930 1,945 1,170 2,035China Steel TWD mn 11,054 10,960 7,227 8,426Angang RMB mn 1,152 1,414 315 1,423Maanshan RMB mn 521 879 302 743SAIL INRm 20,849 20,207 17,285 16,269TATA INRm 24,052 17,681 14,677 13,947JSW INRm 7,170 5,924 3,952 4,713

Source: HSBC estimates

What's in the price? Below trend valuations

We believe the market is now pricing in an unlikely

bearish scenario with implied ROEs below historical

trend. At current prices, we estimate the implied

ROEs for our preferred steel names (POSCO,

Maanshan, SAIL, Baosteel) are materially below

their respective historical ROEs. For full details,

please refer to the relevant table on page 8.

Sector scorecard summary

We first introduced our sector scorecard on 19 June

2009. The aim of the scorecard is to assist in refining

the stock selection process, with the full tabledetailed on the following page. Under this system,

POSCO, SAIL and Maanshan rank best, while

Nippon Steel, JFE and Tata Steel rank among the

worst. We note that these results are consistent with

our PB-ROE valuation methodology.

Stock-specifics

We reiterate our OW(V) ratings on POSCO,

Maanshan, Baosteel, Angang, China Steel,

SAIL, JSW and BlueScope.

POSCOs strong balance sheet, diverse

high-end product mix and low-cost

operations remain attractions for a

quality, defensive regional steel leader.

We believe Maanshan has attractive

valuations, trading at 0.8x PB compared

to its recent high of 1.6x and the sector

average of 1.2x.

We like Baosteel for its leverage to

resilient domestic appliance demand

given its dominant market position.

Angang has a raw material advantage,

with a favourable iron ore pricing

arrangement with its parent which should

ensure a cost advantage during an iron

ore upswing.

We like China Steel for its volume

growth and high dividend yield.

SAIL has 100% self-sufficiency in iron

ore and thus is largely protected from

price increases.

We like JSW Steel for improving iron ore

integration and volume leverage. Further,

if the tie-up with JFE goes through, this

could lead to a potential rerating.

BlueScope remains one of the cheapest

stocks in the sector, trading at 0.7x 2010ePB against the sector average of 1.2x. We

believe the company is a direct

beneficiary of recent currency revisions

by our FX Research Team.

We keep JFE, NSC and Tata Steel at N(V).

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Whats in the price? HSBC Steel target prices and ratings 16 June 2010

POSCO NSC JFE Baosteel Angang Maanshan CSC SAIL TATA JSW BSL

Assumptions- Risk free rate 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 5.0%- Market risk premium 6.5% 3.5% 3.5% 6.0% 6.0% 6.0% 5.5% 6.5% 6.5% 6.5% 4.5%- Beta 1.3 1.2 1.3 1.1 1.3 1.3 1.0 1.2 1.3 1.3 1.2CoE 12% 8% 9% 11% 12% 12% 10% 12% 13% 12% 11%Long term growth 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%Current price 472,000 318 2,986 6.13 9.91 3.53 30.70 198 486 1,057 2.35Currency KRW JPY JPY RMB HKD HKD TWD INR INR INR AUDFinancial year for book value Dec-10 Mar-11 Mar-11 Dec-10 Dec-10 Dec-10 Dec-10 Mar-12 Mar-12 Mar-12 Jun-11BV/share 460,000 300 2,931 5.55 8.85 4.24 20.8 115 457 694 3.27Current PB 1.0 1.1 1.0 1.1 1.1 0.8 1.5 1.7 1.1 1.5 0.7Implied ROE 12% 9% 9% 12% 14% 10% 14% 21% 13% 19% 8%Historical ROE (2002-08) 15% 11% 15% 15% 15% 12% 19% 40% 33% 21% 16%Forecast ROE (2010-12) 16% 10% 12% 11% 12% 13% 17% 21% 17% 21% 8%Long-term sustainable ROE 16% 10% 10% 15% 15% 13% 17% 25% 15% 24% 10%Target PB 1.3 1.2 1.2 1.4 1.3 1.1 1.8 2.1 1.2 1.9 0.9Price (derived) 598,000 361 3,370 7.76 11.33 4.45 37.48 243 548 1318 2.94HSBC target 600,000 360 3,350 8.00 12.00 4.50 37.00 256 562 1280 3.00Upside / (downside) 27.1% 13.2% 12.2% 30.5% 21.1% 27.5% 20.5% 29.3% 15.7% 21.1% 27.7%Div yield 2.7% 1.3% 2.4% 3.3% 3.5% 3.6% 8.1% 1.5% 1.4% 1.3% 1.7%Potential return 29.8% 14.5% 14.6% 33.8% 24.5% 31.0% 28.7% 30.8% 17.1% 22.4% 29.4%Neutral band +0.5 to 20.5 -2.5 to 17.5 -2.5 to 17.5 +0.0 to 20.0 +0.0 to 20.0 +0.0 to 20.0 -0.5 to 19.5+0.5 to 20.5 +0.5 to 20.5 +0.5 to 20.5 -0.5 to 19.5HSBC rating OW (V) N (V) N (V) OW (V) OW (V) OW (V) OW (V) OW (V) N (V) OW (V) OW (V)

Previous rating OW (V) N (V) N (V) OW (V) OW (V) OW (V) OW (V) OW (V) N (V) OW (V) OW (V)Previous target 650,000 360 3,600 9.00 15.00 6.00 42.00 272 690 1460 3.50Previous ROE assumptions 17% 10% 10% 17% 20% 16% 19% 25% 17% 24% 11%Previous PB multiple 1.4 1.2 1.2 1.5 1.6 1.3 2.0 2.1 1.4 1.9 1.1


HSBC Asia Steel sector score card

Rank Stock Gearing Iron ore integration Profitability ROE / ROIC Valuation Overall score20% 10% 20% 20% 30% 100%

1 Posco 2.0 4.0 4.0 2.5 1.7 2.62 SAIL 1.0 1.0 4.0 1.5 9.7 4.33 Maanshan 6.0 10.0 6.3 5.0 2.0 5.14 Bluescope 4.0 4.0 7.3 10.0 2.7 5.55 China Steel 3.0 9.0 6.7 3.0 8.3 5.96 Angang 8.0 8.0 6.3 7.0 5.0 6.67 Baosteel 5.0 10.0 7.0 7.0 6.3 6.7

8 JSW 11.0 6.0 3.0 3.5 9.0 6.89 Nippon 7.0 2.0 6.7 10.0 7.3 7.110 Tata Steel 10.0 3.0 6.0 8.0 7.7 7.411 JFE 9.0 7.0 8.7 8.5 6.3 7.8


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Asia Steel performance table

Stock and commodity performances ytd, as at 16 Jun 2010

Unit Spot 1M 3M 6M 1Y y-t-d Peakprice

Date ofpeak

Spot vspeak

Troughprice

Date oftrough

Spot vstrough

Equities

POSCO KRW 472000 7% -14% -21% 10% -24% 625000 11-Jan-10 -24% 434500 20-May-10 9%NSC JPY 318 -2% -8% -12% -15% -15% 395 12-Jan-10 -19% 300 09-Jun-10 6%JFE JPY 2986 -2% -17% -13% -6% -18% 3840 05-Apr-10 -22% 2798 09-Jun-10 7%Baosteel RMB 6.13 -2% -25% -31% -6% -37% 9.66 01-Jan-10 -37% 6.05 08-Jun-10 1%Angang A RMB 7.76 -2% -36% -49% -34% -52% 16.00 01-Jan-10 -52% 7.68 08-Jun-10 1%Angang H HKD 9.91 -1% -32% -43% -21% -42% 18.24 05-Jan-10 -46% 9.08 10-Jun-10 9%Maanshan A RMB 3.46 1% -19% -33% -23% -31% 5.08 05-Jan-10 -32% 3.38 07-Jun-10 2%

Maanshan H HKD 3.51 2% -25% -40% -28% -38% 6.07 05-Jan-10 -42% 3.38 25-May-10 4%China Steel TWD 30.70 -2% -7% -2% 14% -7% 35.30 11-Jan-10 -13% 29.30 09-Jun-10 5%SAIL INR 198.05 -6% -19% -6% 19% -18% 256.35 06-Apr-10 -23% 186.70 25-May-10 6%Tata Steel INR 485.50 -9% -24% -13% 8% -21% 694.45 16-Apr-10 -30% 452.40 08-Jun-10 7%JSW Steel INR 1056.80 -10% -15% 8% 55% 4% 1289.25 16-Apr-10 -18% 960.65 10-Feb-10 10%BlueScope AUD 2.35 -3% -17% -17% -6% -24% 3.30 11-Jan-10 -29% 2.15 25-May-10 9%Equity indicesKorea Composite 1705.3 3% 2% 2% 22% 1% 1752.20 26-Apr-10 -3% 1552.79 08-Feb-10 10%TOPIX 892.4 -3% -5% -1% -2% -2% 998.90 15-Apr-10 -11% 850.37 09-Jun-10 5%Shanghai Index 2,570 0% -16% -21% -7% -22% 3,282 05-Jan-10 -22% 2,512 07-Jun-10 2%Taiwan Weighted 7,454 -2% -5% -4% 20% -9% 8,357 15-Jan-10 -11% 7,072 09-Jun-10 5%HSI Index 20,062 2% -6% -7% 10% -8% 22,417 06-Jan-10 -11% 18,986 25-May-10 6%ASX Ordinary 4572.1 2% -6% -2% 16% -6% 5024.10 15-Apr-10 -9% 4286.30 25-May-10 7%Sensex 17462.9 4% 0% 3% 17% 0% 17970.02 07-Apr-10 -3% 15790.93 05-Feb-10 11%CurrenciesJPY:USD 91 1% -1% -2% 5% 2% 88 03-Mar-10 -3% 95 04-May-10 4%RMB:USD 6.83 0% 0% 0% 0% 0% 6.82 09-Apr-10 0% 6.83 11-Feb-10 0%HKD:USD 7.79 0% 0% 0% -1% 0% 7.75 06-Jan-10 0% 7.80 08-Jun-10 0%KRW:USD 1230 -6% -8% -5% 2% -5% 1104 26-Apr-10 -10% 1254 26-May-10 2%TWD:USD 32 -1% -2% 0% 2% -1% 31 29-Apr-10 -3% 32 07-Jun-10 1%AUD:USD 1.16 -2% -6% -4% 9% -4% 1.07 14-Apr-10 -8% 1.24 07-Jun-10 6%INR:USD 46 -2% -2% 0% 3% 0% 44 09-Apr-10 -5% 48 25-May-10 2%Commodities pricesSteelChina domestic HRC RMB/t 4,180 0% 0% 12% 14% 9% 4,570 14-Apr-10 -9% 3,700 26-Jan-10 13%China export HRC USD/t 605 -12% 3% 19% 32% 19% 690 11-May-10 -12% 510 01-Jan-10 19%Japan domestic HRC USD/t 787 1% 13% 24% 46% 28% 803 20-May-10 -2% 600 07-Jan-10 31%East Asia import HRC USD/t 625 -11% 2% 18% 30% 18% 710 27-Apr-10 -12% 530 01-Jan-10 18%China domestic rebar RMB/t 3,820 -5% -3% 9% 9% 2% 4,340 13-Apr-10 -12% 3,710 05-Mar-10 3%China export rebar USD/t 590 -11% 8% 16% 16% 16% 660 20-Apr-10 -11% 510 01-Jan-10 16%China rebar future RMB/t 3,995 -1% -10% -1% 2% -4% 4,614 16-Apr-10 -13% 3,946 05-Feb-10 1%Japan domestic rebar USD/t 700 1% 13% 26% 32% 30% 714 20-May-10 -2% 525 07-Jan-10 33%East Asia import rebar USD/t 580 -15% 4% 14% 25% 13% 685 20-Apr-10 -15% 515 01-Jan-10 13%

BulksIron ore cif (India to China) USD/t 152 -14% 10% 43% 102% 36% 189.5 23-Apr-10 -20% 112 01-Jan-10 36%Hebei iron ore RMB/t 1,190 -6% 6% 38% 65% 31% 1,400 16-Apr-10 -15% 920 01-Jan-10 29%Coking coal (Aust) USD/t 235 0% 7% 38% 104% 38% 250 01-Apr-10 -6% 205 01-Jan-10 15%China spot RMB/t 1,720 7% 7% 27% 66% 27% 1,720 31-May-10 0% 1,350 01-Jan-10 27%Commodities inventorySteelLong Steel Mt 8.3 -3% -14% 56% 99% 49% 9.7 05-Mar-10 -15% 5.6 01-Jan-10 47%Flat Steel Mt 7.3 -2% -16% 8% 45% 9% 8.8 05-Mar-10 -17% 6.7 01-Jan-10 9%Total Steel Mt 15.6 -2% -15% 29% 69% 27% 18.6 05-Mar-10 -16% 12.3 01-Jan-10 27%BulksIron ore port inventory Mt 72 1% 0% 3% 2% 7% 73 05-Jun-10 -1% 67 01-Jan-10 8%

Source: Datastream, Bloomberg, China Coal Resource

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HSBC Asia Steel valuation tableHSBC Asian steel comparables, calendar year basis, 16 June 2010

Share Market cap _____________________ EPS* ______________________ ______________________DPS* ______________________price (USDm) 2008 2009 2010e 2011e 2012e 2008 2009 2010e 2011e 2012e

POSCO KRW 472,000 29,002 58,905 41,380 64,290 80,931 96,477 10,000 8,000 12,858 16,186 19,295Nippon Steel JPY 318 23,620 31 5 16 31 36 7 3 3 6 8JFE Holdings JPY 2,986 20,020 360 149 256 355 379 98 38 59 82 88Baosteel RMB 6.13 15,712 0.37 0.33 0.52 0.71 0.74 0.18 0.20 0.20 0.32 0.33Angang - A RMB 7.76 6,984 0.41 0.10 0.59 1.18 1.17 0.21 0.06 0.30 0.59 0.58Angang - H HKD 9.91 1,381 0.41 0.10 0.59 1.18 1.17 0.21 0.06 0.30 0.59 0.58Maanshan - A RMB 3.46 3,022 0.10 0.05 0.32 0.51 0.76 0.00 0.04 0.11 0.18 0.27Maanshan - H HKD 3.53 785 0.10 0.05 0.32 0.51 0.76 0.00 0.04 0.11 0.18 0.27China Steel NTD 30.70 12,404 2.01 1.53 2.92 3.80 4.28 1.73 1.40 2.50 3.26 3.67

SAIL INR 198 17,480 14.66 15.46 17.20 22.04 26.18 3.18 2.88 2.88 3.13 3.05Tata Steel INR 486 9,210 82.81 -2.99 34.54 63.50 99.53 15.98 9.99 6.94 11.53 13.17JSW Steel INR 1,057 4,228 32.07 65.94 92.13 133.42 154.46 4.25 7.38 13.06 20.01 23.16BlueScope AUD 2.35 3,702 0.92 -0.61 0.14 0.37 0.23 0.29 0.00 0.07 0.19 0.11Total 147,549

_____________________ PE (x) ______________________ __________________ FCF yield (%)___________________2008 2009 2010e 2011e 2012e 2008 2009 2010e 2011e 2012e

POSCO 8.0 11.4 7.3 5.8 4.9 9% 3% -5% 12% 15%Nippon Steel 10.2 69.0 19.5 10.4 8.9 8% -1% 1% 5% 7%JFE Holdings 8.3 20.0 11.6 8.4 7.9 10% 5% 7% 9% 1%Baosteel 16.6 18.5 11.8 8.6 8.3 0% 6% 6% 11% 13%Angang - A 18.7 74.7 13.0 6.6 6.6 -12% 3% 3% 14% 14%Angang - H 21.0 83.6 14.6 7.3 7.4 -8% 2% 2% 9% 9%Maanshan - A 33.4 67.9 10.9 6.8 4.5 8% 16% 14% 18% 27%

Maanshan - H 29.8 60.7 9.8 6.1 4.0 7% 14% 12% 15% 23%China Steel 15.3 20.1 10.5 8.1 7.2 5% 3% 10% 14% 18%SAIL 13.5 12.8 11.5 9.0 7.6 1% -4% -5% -5% 12%Tata Steel 5.9 nm 14.1 7.6 4.9 12% -1% 6% 10% 31%JSW Steel 33.0 16.0 11.5 7.9 6.8 -10% -6% 3% 3% -2%BlueScope 2.6 nm 16.5 6.4 10.2 9% -6% 6% 9% 8%Average 12.3 30.3 12.3 8.0 7.1 5% 2% 2% 8% 12%

EV/t capacity _________________ EV/EBITDA (x) __________________ ____________________ ROE (%)_____________________Reuters (USD) 2008 2009 2010e 2011e 2012e 2008 2009 2010e 2011e 2012e

POSCO 005490.KS 826 4.4 6.8 4.5 3.2 2.7 17% 11% 15% 16% 17%Nippon Steel 5401.T 1155 5.9 10.1 9.6 7.4 6.4 11% 2% 6% 10% 11%JFE Holdings 5411.T 1040 5.0 8.0 7.2 6.1 5.8 15% 6% 9% 12% 12%Baosteel 600019.SS 794 5.4 5.6 4.6 3.8 3.2 7% 6% 9% 12% 12%Angang - A 000898.SZ 641 8.7 11.3 6.8 4.5 4.3 6% 1% 8% 14% 13%

Angang - H 0347.HK 641 8.7 11.3 6.8 4.5 4.3 6% 1% 8% 14% 13%Maanshan - A 600808.SS 335 6.1 6.7 3.9 2.9 2.2 3% 1% 9% 13% 17%Maanshan - H 0323.HK 335 6.1 6.7 3.9 2.9 2.2 3% 1% 9% 13% 17%China Steel 2002.TW 1096 10.6 22.1 8.7 6.9 5.9 10% 8% 15% 18% 19%SAIL SAIL.BO 1134 7.8 7.1 6.1 5.0 3.4 25% 22% 20% 22% 21%Tata Steel TISC.BO 689 4.9 7.6 6.2 5.2 3.5 23% -1% 9% 15% 20%JSW Steel JSTL.BO 1098 12.3 10.6 8.0 5.8 5.0 8% 15% 18% 22% 21%BlueScope BSL.AX 634 5.5 8.9 5.9 4.2 4.1 11% 1% 5% 9% 8%Average 931 6.3 9.2 6.6 5.1 4.3 14% 8% 12% 15% 15%

* All data in local currency except for Maanshan H and Angang H which are in RMBSource: Company data, HSBC estimates

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HSBC Asia Steel valuation tableHSBC Asian steel comparables, calendar year basis, 16 June 2010

Rating ___________________ Price/book ____________________ ____________________ ROIC (%) ____________________2008 2009 2010e 2011e 2012e 2008 2009 2010e 2011e 2012e

POSCO OW (V) 1.3 1.2 1.0 0.9 0.8 27% 13% 20% 23% 24%Nippon Steel N (V) 1.2 1.2 1.1 1.0 0.9 11% 2% 4% 8% 9%JFE Holdings N (V) 1.2 1.1 1.0 0.9 0.9 11% 5% 7% 8% 8%Baosteel OW (V) 1.2 1.1 1.1 1.0 0.9 7% 6% 8% 10% 11%Angang - A OW (V) 1.1 1.1 1.0 0.9 0.8 5% 2% 6% 10% 10%Angang - H OW (V) 1.2 1.2 1.1 1.0 0.9 5% 2% 6% 10% 10%Maanshan - A OW (V) 1.0 1.0 0.9 0.8 0.7 5% 3% 8% 13% 17%Maanshan - H OW (V) 0.9 0.9 0.8 0.8 0.7 5% 3% 8% 13% 17%China Steel OW (V) 1.6 1.6 1.5 1.4 1.3 15% 4% 15% 19% 23%

SAIL OW (V) 3.0 2.5 2.2 1.8 1.5 21% 19% 20% 21% 22%Tata Steel N (V) 1.4 1.4 1.2 1.1 0.9 16% -59% -12% 12% 17%JSW Steel OW (V) 2.5 2.2 1.9 1.6 1.3 7% 6% 8% 10% 12%BlueScope OW (V) 0.6 0.8 0.7 0.7 0.7 8% 2% 5% 8% 8%Average 1.5 1.4 1.2 1.1 1.0 15% 4% 10% 14% 15%

Target Return to _________________ Net debt/equity__________________ _________________ EPS growth (%) _________________price target 2008 2009 2010e 2011e 2012e 2008 2009 2010e 2011e 2012e

POSCO KRW 600,000 29.8% 5% -2% -2% -9% -9% 21.6% -29.8% 55.4% 25.9% 19.2%Nippon Steel JPY 360 14.5% 56% 57% 50% 45% 40% -41.7% -85.2% 253.9% 87.5% 17.2%JFE Holdings JPY 3,350 14.6% 104% 102% 92% 80% 71% -18.4% -58.5% 71.8% 38.3% 6.9%Baosteel RMB 8.00 33.8% 32% 25% 29% 21% 7% -49.2% -10.0% 56.1% 37.6% 3.2%Angang - A RMB 9.50 26.3% 44% 57% 58% 46% 36% -63.1% -74.9% 472.3% 98.9% -1.2%Angang - H HKD 12.00 24.5% 44% 57% 58% 46% 36% -63.1% -74.9% 472.3% 98.9% -1.2%Maanshan - A RMB 4.50 33.2% 61% 55% 35% 21% 10% -70.3% -50.9% 522.9% 60.2% 50.3%

Maanshan - H HKD 4.50 31.0% 61% 55% 35% 21% 10% -70.3% -50.9% 522.9% 60.2% 50.3%China Steel NTD 37.00 28.7% 28% 26% 16% 8% 2% -55.0% -24.1% 90.9% 30.2% 12.6%SAIL INR 256 30.8% -37% -40% -25% -10% -24% -16.7% 5.5% 11.2% 28.2% 18.8%Tata Steel INR 562 17.1% 174% 160% 141% 128% 92% -40.2% nm nm 83.8% 56.7%JSW Steel INR 1,280 22.4% 231% 230% 192% 157% 137% -63.2% 105.6% 39.7% 44.8% 15.8%BlueScope AUD 3.00 29.4% 29% 15% 15% 12% 10% 10.6% nm nm 157.0% -37.2%Average 48% 44% 40% 34% 25% -26.2% -35.5% 128.9% 51.8% 16.7%

_______________ EBITDA margin (%) ________________ ________________ Dividend yield (%) ________________2008 2009 2010e 2011e 2012e 2008 2009 2010e 2011e 2012e

POSCO 27.6% 19.3% 27.1% 28.1% 31.3% 2.0% 1.6% 2.9% 3.3% 3.8%Nippon Steel 13.8% 10.3% 9.4% 10.2% 12.0% 2.2% 0.8% 1.2% 1.9% 2.1%JFE Holdings 17.7% 13.4% 14.5% 14.9% 16.3% 2.9% 1.1% 1.9% 2.5% 2.6%Baosteel 13.3% 16.6% 17.0% 17.0% 17.1% 2.6% 2.9% 2.9% 4.9% 5.1%Angang - A 11.7% 11.3% 17.2% 20.6% 23.6% 2.2% 0.6% 4.5% 6.6% 7.3%

Angang - H 11.7% 11.3% 17.2% 20.6% 23.6% 2.0% 0.6% 4.1% 6.0% 6.6%Maanshan - A 9.9% 12.2% 15.9% 16.0% 21.0% 0.0% 1.0% 4.1% 4.6% 6.9%Maanshan - H 9.9% 12.2% 15.9% 16.0% 21.0% 0.0% 1.1% 4.5% 5.1% 7.6%China Steel 17.3% 12.7% 23.5% 21.6% 27.2% 5.2% 4.2% 8.4% 9.3% 13.3%SAIL 21.6% 25.2% 30.4% 31.4% 37.2% 1.5% 1.3% 1.3% 1.4% 1.4%Tata Steel 12.8% 14.1% 14.8% 15.6% 21.6% 2.6% 1.1% 1.1% 2.3% 2.6%JSW Steel 20.6% 21.4% 21.6% 23.9% 32.7% 0.3% 0.8% 1.2% 1.9% 3.7%BlueScope 9.4% 5.6% 7.1% 9.0% 9.4% 11.1% 0.0% 3.8% 4.2% 5.7%Average 18.0% 15.8% 19.5% 20.2% 23.5% 2.6% 1.6% 2.8% 3.6% 4.3%

Source: Company data, HSBC estimates

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3Q to signal bottom 3Supply cuts under way 4

Demand seasonality 3Q pain before 4Q gain 5

Steel prices to stabilise 5

Oversold Valuations below trend and replacement costs 6

3Q margin squeeze pricesdown, costs up 13

Company Summaries 17POSCO (OW(V), TP KRW600,000) 18

Nippon Steel (N(V), TP JPY360) 19

JFE (N(V), TP JPY3,350) 20

Baosteel (OW(V), TP RMB8) 21

Angang (OW(V), TP HKD12 / RMB9.5) 22

Maanshan (OW(V), TP HKD4.5 / RMB4.5) 23

China Steel (OW(V), TP TWD37) 24

SAIL (OW(V), TP INR256) 25

Tata Steel (N(V), TP INR562) 26

JSW Steel (OW(V), TP INR1,280) 27

Bluescope (OW(V), TP AUD3) 28

Disclosure appendix 32

Disclaimer 35

Contents

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Lowering steel price forecast by 5%

We continue to believe that steel demand in the

region remains robust and expect regional markets to

remain tight. However, given the macroeconomic

concerns surrounding Chinas overheating property

sector and the sovereign debt crisis in Europe,

market sentiment has been hit hard, leading to a

negative flow-on effect for regional steel prices. As a

result, we cut our 2010 steel price estimates by 5%

to fully reflect this period of spot market weakness.

HSBC 2010e steel price forecast changes

Old New Chg

Asia (USD/t)

HRC 688 652 -5%Rebar 649 612 -6%

China (USD/t)

HRC 670 641 -4%Rebar 650 610 -6%

Source: CRU, HSBC estimates

Chinese mills under our coverage have already

announced a cut to their July contract price in the

range of 8-9%. Regional mills has been more

resilient: Nippon Steel recently secured a 25%

price hike for the April-September 2010 period

while Steel Business Briefing (SBB) reports that

POSCO is considering a quarterly price increase

to reflect higher raw material costs. At the same

time, China Steel Corp announced a price hike of

an average 6.6% for its July shipments.

Since recent peaks in mid-April, HRC prices have

fallen 8.5% while Rebar has suffered a 12% fall.

However, we believe domestic steel prices in China

have reached stable support levels, with spot prices

below industry average costs of production.

We calculate current HRC production costs in

China to be RMB3,704/t (ex VAT), based on spot

domestic iron ore and coking coal prices. Given

that spot HRC prices are RMB3,573/t (ex VAT),

the average domestic commodity grade HRC

producer is making a loss of RMB132/t. We

believe this provides a floor to HRC prices and

historically, prices have rebounded strongly after

falling below cost of production levels.

3Q margin squeeze prices down, costs up

Reduce 2010 steel price forecast by 5% to reflect weak spot

prices and poor market sentiment

Chinas marginal steel capacity under losses at current prices; will

result in production cutback and provide pricing floor

Iron ore price set to increase in 3Q as flagged by the miners,

coking coal contract price increase 12% q-o-q

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China HRC production cost

RMB/t

Iron ore 1,627Coking coal 942Rolling 1,000Transport 135Cost 3,704HRC price 3,573Profit/ (loss) -132

Source: HSBC, SBB, Bloomberg

China HRC prices and production cost

2,300

2,800

3,300

3,800

4,300

4,8005,300

Jun-07

Sep-07

Dec-07

Mar-08

Jun-08

Sep-08

Dec-08

Mar-09

Jun-09

Sep-09

Dec-09

Mar-10

Jun-10

HRC production cost HRC price ex VAT

Source: HSBC, Bloomberg, SBB

Raw material prices

It has been widely accepted by the market that the

traditional annual benchmark pricing mechanisms

for bulks (iron ore and coking coal) have been

done away with. Towards the end of MarQ10, the

major miners (VALE, BHP and RIO) all but

confirmed a structural shift to quarterly contract

pricing, although there is limited transparency

with respect to the negotiations process.

Pricing for quarterly iron ore

Metal Bulletinhas attempted to derive the

quarterly iron ore pricing methodology for both

VALE and BHP/RIO.

VALEs pricing methodology is more transparent

as it uses the average prices index (chosen at the

customers discretion) for the three-month period

directly proceeding the month before the quarter

in question. Therefore, JunQ10 contracts (forApril, May, June) are priced to the average of

index prices from 1 Dec 2009 to 28 Feb 2010.

In order to test this pricing methodology, we use

theMetal Bulletin/Bloomberg China Iron ore

fines price as our base index. Based on the

guidelines, we calculate the Dec 09 to Feb 10

average price was USD129.80/t (on a 66% grade

CFR basis). Taking the average Brazil-China

freight rate of USD30.11/t over the same period,

we derive a VALE JunQ10 contract price of

USD99.69/t (on a FOB basis). This compares

favourably to press reports (Bloomberg, Reuters)

in mid-April 2010 that suggested VALE agreed

on JunQ10 contract prices of cUSD100-110/t.

Metal Bulletin notes that while BHP and RIO

have not revealed their pricing formulae, it

believes that both companies use a pricing

mechanism based on the full preceding quarter.

Therefore, JunQ10 pricing uses an index average

for the 1 Jan to 31 Mar 2010 period. As done

previously, we use theMetal Bulletin/Bloomberg

China Iron ore fines price as our base index andderive a Jan-Mar average CFR price of

USD133.64/t. With Australia-China freight rates

averaging USD10.64/t over this period, we arrive

at a BHP/RIO JunQ10 FOB fines prices of

USD123/t. Once again, this compares favourable

to press reports (Reuters) that indicated a likely

JunQ10 price settlement of USD120/t.

Given we have established theMetal Bulletin

pricing methodology as a fair indicator for

quarterly iron ore pricing, we calculate indicative

VALE, BHP/RIO SepQ10 pricing outcomes.

Iron ore pricing on a FOB basis (USD/t)

JunQ10 SepQ10e Spot QoQ % Vs Spot %

VALE 105.00 146.16 132.51 39% -9%BHP/RIO 120.00 157.44 139.54 31% -11%

Note: Spot pricing is based on 14 June 2010.Source: Bloomberg, Metal Bulletin, HSBC estimates

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HSBC regional steel price assumptions and changes from previous forecasts

____________________Far East steel price (USD/t)______________________ __________________ Change from previous forecast____________________Rebar Plate HRC CRC HDG Rebar Plate HRC CRC HDG

2009 500 513 490 585 648 0% 0% 0% 0% 0%2010e 612 686 652 760 816 -6% -5% -5% -5% -4%2011e 676 768 713 813 870 0% 0% 0% 0% 0%2012e 635 720 670 769 829 0% 0% 0% 0% 0%2013e 604 685 638 737 799 0% 0% 0% 0% 0%

_____________________ China steel price (USD/t)_______________________ __________________ Change from previous forecast____________________Rebar Plate HRC CRC HDG Rebar Plate HRC CRC HDG

2009 525 527 528 654 654 0% 0% 0% 0% 0%2010e 610 657 641 782 782 -6% -3% -4% -2% -2%2011e 675 699 695 797 808 0% 0% 0% 0% 0%2012e 648 677 668 778 787 0% 0% 0% 0% 0%2013e 628 661 648 763 771 0% 0% 0% 0% 0%

Source: CRU, HSBC estimates

Asian Steel EBITDA sensitivity to USD10/t change in steel prices

____Base case ASP (USD/ t) ____ Unit ______Forecast EBITDA________ ________ EBITDA chg _________2010e 2011e 2010e 2011e 2010e 2011e

POSCO 810 879 KRW bn 7,923 10,183 5% 4%Nippon steel 1,563 1,645 JPY bn 431 548 7% 6%JFE 1,132 1,196 JPY bn 505 538 6% 6%Baosteel 1,234 1,151 RMB mn 31,230 36,574 5% 5%Angang 674 709 RMB mn 13,499 19,393 10% 7%Maanshan 661 687 RMB mn 9,357 11,150 11% 9%China Steel 727 712 TWD mn 51,258 61,409 7% 6%SAIL 773 797 INR mn 124,593 165,134 5% 4%Tata Steel 904 920 INR mn 152,671 167,163 8% 7%JSW Steel 769 796 INR mn 52,277 71,721 6% 6%BlueScope 1,493 1,804 AUD mn 580 1,116 11% 7%


Asian Steel EBITDA sensitivity to USD10/t change in iron ore or coking coal price

Unit ______ Forecast EBITDA _______ ___ Coking coal sensitivity _____ ______Iron ore sensitivity ______2010e 2011e 2010e 2011e 2010e 2011e

POSCO KRW bn 7,923 10,183 -4% -3% -9% -7%Nippon steel JPY bn 431 548 -4% -4% -11% -9%JFE JPY bn 505 538 -4% -3% -10% -9%Baosteel RMB mn 31,230 36,574 -4% -4% -8% -8%Angang RMB mn 13,499 19,393 -6% -4% -16% -11%Maanshan RMB mn 9,357 11,150 -6% -6% -17% -15%China Steel TWD mn 51,258 61,409 -5% -5% -11% -10%

SAIL INR mn 124,593 165,134 -3% -3% 0% 0%Tata Steel INR mn 152,671 167,163 -5% -4% -13% -12%JSW Steel INR mn 52,277 71,721 -4% -3% -10% -9%BlueScope AUD mn 580 1,116 -16% -8% -13% -7%

Source: HSBC estimates; Note: base case iron ore +81% in 2010, -18% in 2011, coking coal +79% in 2010, +8% in 2011

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Company Summaries

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POSCO (OW(V), TPKRW600,000)

Remains the regional leader

We continue to view POSCO as the pick of the

sector, with its strong balance sheet, diverse high-

end product mix and low-cost operations making

it stand out amongst its regional peers. In a recent

HSBC hosted conference in early May 2010,

management noted market conditions were robust

and the company was running at full productioncapacity.

In mid-May, according to Reuters POSCO was

confirmed as the preferred bidder for the

controlling stake in Daewoo International for a

reported offer price of USD3bn (cKRW3.4trn).

We see the completion of this proposed

transaction as a key near-term catalyst, being

strategically and financially positive. The

company has stated that it expects the deal to be

finalised in 2H10.

Earnings changes

POSCO earnings revisions

Revenues (KRWbn) Old New % Chg

2010e 34,701 34,876 0.5%2011e 37,298 37,827 1.4%2012e 36,732 37,003 0.7%

EBIT (KRWbn) Old New % Chg

2010e 7,069 5,674 -19.7%2011e 7,997 7,717 -3.5%2012e 9,037 9,192 1.7%

Net Profit (KRWbn) Old New % Chg

2010e 5,470 4,929 -9.9%2011e 6,181 6,204 0.4%2012e 7,043 7,396 5.0%


Valuation and risksWe reiterate our OW(V) rating and reduce our

target price to KRW600,000 (KRW650,000),

valuing the stock at 1.3x PB (1.4x) and 2010e

book value of KRW460,000 per share. We arrive

at a PB multiple of 1.3x from our residual income

model (P/B= ROE-g/COE-g) using our 2010-12

forecast ROE of 16% (17%).

We consider POSCO stock to be volatile. Under

our research model, for Korean stocks with avolatility indicator, the Neutral band is 10

percentage points around the hurdle rate of 10.5%

(or 0.5-20.5%). Our KRW600,000 target price

implies upside of 27.1% over the closing price on

16 June of KRW472,000. Adding in the 2.7%

dividend yield implies a potential return of 29.8%.

As such, we maintain our OW(V) rating.

The upside and downside risks for POSCO lie in

the movement of steel prices. The key downside

risks are a more severe slowdown in the US or

China, which in turn would negatively impact

steel consumption growth. On the raw material

side, movements in iron ore, coal and nickel

prices provide additional risk.

POSCO: key data

YE Dec Sales(KRWbn)

NPAT(KRWbn)

EPS(KRW)

PE(x)

PB(x)

Div Yield(%)

ND/E(%)

EV/EBITDA(x)

FY09 26,954 3,172 41,380 11.4 1.2 1.7 -2 6.8

FY10e 34,876 4,929 64,290 7.3 1.0 2.7 -2 4.5FY11e 37,827 6,204 80,931 5.8 0.9 3.4 -9 3.2FY12e 37,003 7,396 96,477 4.9 0.8 4.1 -9 2.7

Note: Ratios based on closing price as on 16 June 2010Source: Company data, HSBC estimates

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Nippon Steel (N(V), TPJPY360)

Price hike a positive, but fairly valued

Our previous uncertainty over the ability of the

company to effectively pass on higher raw material

costs to downstream customers has eased, with

confirmation that NSC has reached an agreement

with Toyota to a 25% contract price hike

(+JPY20,000/t or USD219/t) for the six months to

September 2010. We note that this is the first priceincrease between the two parties for two years and is

indicative that demand for high-end steel products

remains firm. This is supported by Bloomberg news

reports that Toyota and its rival automaker Nissan

have plans to increase their respective global 2010

auto production by 1.7% to 7.4m units and 14.2% to

3.75m units, respectively.

That said at current levels, we see NSC as fairly

valued and maintain our Neutral (V) rating.

Earnings changes

NSC earnings revisions

Revenues (JPYbn) Old New % Chg

2010e 4,799 4,786 -0.3%2011e 5,303 5,336 0.6%2012e 5,014 5,017 0.1%

EBIT (JPYbn) Old New % Chg

2010e 225 199 -11.7%2011e 307 302 -1.5%2012e 381 351 -7.8%

Net Profit (JPYbn) Old New % Chg

2010e 163 146 -10.3%2011e 222 218 -1.9%2012e 244 240 -1.8%

Source: HSBC estimates. Note: 2010e represents March 2011 etc.

Valuation and risksWe keep a Neutral (V) rating for NSC and

maintain our target price at JPY360, valuing the

stock at 1.2x (same) PB in line with its two-year

historical average and FY11e book value of

JPY300/share. We arrive at a PB of 1.2x from our

residual income model (PB = ROE-g/COE-g)

using a sustainable ROE of 10% (same).

Our JPY360 target price suggests potential upside

of 13.2% from the closing price of JPY318 on 16June. Adding in the 1.3% dividend yield implies a

potential return of 14.5%.

The key up and downside risk to our rating lies in

the movement of steel and raw material prices.

The likelihood of the Chinese government either

increasing or reducing steel export taxes also

remains a risk. This in turn would impact the

regional market balance to which NSC sells c40%

of its output and steel export prices. In addition,

the risk of further share market volatility and fund

de-leveraging may also affect performance.

NSC: key data

YE Mar Sales(JPYbn)

NPAT(JPYbn)

EPS(JPY)

PE(x)

PB(x)

Div Yield(%)

ND/E(%)

EV/EBITDA(x)

FY10 3,488 -12 -1.8 nm 1.1 0.5 56 12.5

FY11e 4,786 146 22 14.2 1.1 1.3 47 8.9FY12e 5,336 218 33 9.5 1.0 2.2 44 7.0FY13e 5,017 240 37 8.7 0.9 2.5 38 6.2


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JFE (N(V), TP JPY3,350)Potential contract upside priced in

With headwinds in the form of weak domestic

demand, rising costs and volatile currency still on the

radar, we maintain our Neutral (V) rating on JFE.

On a brighter note, the company recently raised its

HRC and CRC spot prices by JPY10,000/t (or

12% and 11% respectively) for Jul-Sep10

deliveries. We believe that this is indicative of a

future contract price hike, which is in line with

domestic peers and managements announced

flexible pricing formula to ensure quicker pass

through of raw material cost increases. That said,

we believe that potential contract price upside is

already priced in at current levels.

Earnings changes

JFE earnings revisions

Revenues (JPYbn) Old New % Chg

2010e 3,490 3,477 -0.4%2011e 3,665 3,674 0.3%2012e 3,423 3,419 -0.1%

EBIT (JPYbn) Old New % Chg

2010e 336 310 -7.9%2011e 340 335 -1.5%2012e 371 366 -1.3%

Net Profit (JPYbn) Old New % Chg

2010e 181 166 -8.5%2011e 198 195 -1.6%2012e 205 202 -1.5%

Note: 2010e represents March 2011 etc.Source: HSBC estimates.

Valuation and risksWe maintain JFE at Neutral (V) and reduce our

target price to JPY3,350 (JPY3,600), valuing the

stock at 1.2x PB (same), in line with NSCs

valuation and FY11 (March) book value of

JPY2,931. We arrive at a PB of 1.2x from our

residual income model (PB = ROE-g/COE-g)

using a sustainable ROE of 10% (same).

Under our research model, for Japanese stocks

with a volatility indicator, the Neutral band is 10percentage points around the Japan hurdle rate of

7.5% (or -2.5-17.5%). Our JPY3,350 target price

suggests potential return of 14.6% (including div

yield of 2.4%) from the closing price of JPY2,986

as on 16 June, which is within the N(V) band.

The key up and downside risk for the sector lies in

the movement of steel prices; the regions growth

in high-end steel capacity raises the threat of

increased competition. The potential of the Chinese

government either to increase or reduce steel export

taxes also remains a risk. This in turn would impact

the regional market balance to which JFE sells

50% of its output and steel export prices. In

addition, the risk of further share market volatility

and fund de-leveraging may also affect the stocks

performance.

JFE: Key data

YE Mar Sales(JPYbn)

NPAT(JPYbn)

EPS(JPY)

PE(x)

PB(x)

Div yield(%)

ND/E(%)

EV/EBITDA(x)

FY10 2,844 46 86 34.6 1.1 0.7 98 9.8

FY11e 3,477 166 313 9.5 1.0 2.4 89 6.6FY12e 3,674 195 368 8.1 0.9 2.8 77 6.0FY13e 3,419 202 383 7.8 0.9 3.0 69 5.7


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Baosteel (OW(V), TP RMB8)Bottom in 3Q10, recovery in 4Q10

In a HSBC hosted investor call with Baosteel

management in mid June, the company noted that

it saw a likely margin squeeze occurring in 3Q

due to raw material price increases coupled with

lower steel prices. That said, we expect a profit

recovery in 4Q as raw material costs are pushed

lower on increasing domestic supply.

We believe Baosteel is attractively priced at

current levels, particularly given its role as

national steel champion. In our opinion, domestic

steel prices are near the bottom, with spot prices

below cost of production, which should see

marginal producers cut output heading into 3Q. In

addition, steel exports (which account for 8% of

Baosteel sales) should stay at high levels given

the international price premium.

Earnings changesBaosteel earnings revisions

Revenues (RMBm) Old New % Chg

2010e 207,170 202,400 -2.3%2011e 219,545 212,466 -3.2%2012e 235,268 227,648 -3.2%

EBIT (RMBm) Old New % Chg

2010e 17,635 13,719 -22.2%2011e 18,496 17,663 -4.5%2012e 19,313 18,293 -5.3%

Net Profit (RMBm) Old New % Chg

2010e 11,991 9,079 -24.3%2011e 13,140 12,491 -4.9%

2012e 13,699 12,896 -5.9%Source: HSBC estimates

Valuation and risksBaosteels position as Chinas chosen national

champion, in our view, offers it leading status for

consolidation opportunities and parent asset

injections. Baosteel is the domestic market leader

and continues to benefit from exposure to

automobile and appliance demand, with market

shares of 50% and 37% in these respective

sectors. We reiterate our OW(V) rating and

reduce our target price to RMB8 (RMB9) based

on 1.4x PB (1.5x PB) and 2010e book value of

RMB5.55/share. We arrive at a PB of 1.4x from

our residual income model (PB = ROE-g/COE-g)

using a sustainable ROE of 15%, in line with its

2002-09 historical average.

Under our research model, for stocks with a

volatility indicator, the Neutral band is 10ppts

above and below our hurdle rate for Chinese

stocks of 10% (or 0-20%). Our RMB8 target price

suggests potential return of 33.8% (including divyield of 3.3%) from the closing price of RMB6.13

as on 16 June, which is above the N(V) band.

The key downside risk, in our view, lies in the

movement of steel prices. On the raw material

side, movements in coal, nickel, and iron ore

prices provide additional risks. In particular,

Baosteel relies on imported iron ore from

Australia and Brazil.

Baosteel: Key data

YE Dec Sales(RMBm)

NPAT(RMBm)

EPS(RMB)

PE(x)

PB(x)

Div yield(%)

ND/E(%)

EV/EBITDA(x)

FY09 148,525 5,816 0.33 18.5 1.1 3.3 25 5.6

FY10e 202,400 9,079 0.52 11.8 1.1 3.3 29 4.6FY11e 212,466 12,491 0.71 8.6 1.0 5.2 21 3.8FY12e 227,648 12,896 0.74 8.3 0.9 5.4 7 3.2


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Angang (OW(V), TP HKD12 /RMB9.5)

Consolidation is the right direction

While the government approved merger between

Angangs parent company Anshan Iron & Steel and

Panggang Group in late May 2010 should have

minimal near-term impact on the listed company, we

believe there is a distinct possibility for parent asset

injections in the medium term. We see this as a key

catalyst for the stock going forward.

Like its domestic peers, Angang has followed

Baosteels lead in cutting domestic product prices

for July by 9%, reflecting the current soft

domestic pricing environment. That said, we

believe the company will continue to hold a

domestic competitive advantage through its iron

ore pricing arrangement with its parent and

volume growth through the full commissioning of

its 5mt Bayuquan project.

Earnings changes

Angang earnings revisions


2010e 92,816 90,476 -2.5%2011e 97,534 98,119 0.6%2012e 90,274 88,148 -2.4%


2010e 9,165 6,675 -27.2%2011e 13,078 12,345 -5.6%2012e 14,191 12,109 -14.7%


2010e 6,175 4,304 -30.3%2011e 9,119 8,561 -6.1%2012e 10,025 8,461 -15.6%


Valuation and risksWe reiterate our Overweight (V) rating on

Angang and reduce our target price to HKD12

(HKD15), valuing the stock at 1.3x PB (1.6x) and

2010e book value of HKD8.85/share. We arrive at

a PB of 1.3x from our residual income model (PB

= ROE-g/COE-g) using a sustainable ROE of

15% (20%), in line with its 2002-09 historical

average. We decrease our A-share target price to

RMB9.5 (RMB11.5) based on the average A- to

H-share discount of 22%.

We consider Angang A- and H-shares to be

volatile. Under our research model, for stocks

with a volatility indicator, the Neutral band is 10

percentage points above and below our hurdle rate

for Chinese stocks of 10% (or 0-20%). Our

HKD12 target for the H-shares suggests a

potential return, including 3.5% dividend yield, of

24.5%, which is above the Neutral band. Our

RMB9.5 target for the A-shares suggests apotential return, including 3.9% dividend yield, of

26.3%, which is above the Neutral band.

The key downside risk for Angang, in our view,

lies in the movement of steel prices. On the raw

material side, movements in the coal price

represent risks. Delays in Angang groups M&A

activity also pose a risk to current market

expectations.

Angang: Key data

YE Dec Sales(RMBm)

NPAT(RMBm)

EPS(RMB)

PE(x)

PB(x)

Div Yield(%)

ND/E(%)

EV/EBITDA(x)

FY09 70,057 752 0.10 83.6 1.2 0.7 57 11.3

FY10e 90,476 4,304 0.59 14.6 1.1 3.5 58 6.8FY11e 98,119 8,561 1.18 7.3 1.0 6.8 46 4.5FY12e 88,148 8,461 1.17 7.4 0.9 6.7 36 4.3

Note: Ratios based on closing price on 16 June 2010Source: Company data, HSBC estimates

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Maanshan (OW(V), TPHKD4.5 / RMB4.5)

Balanced product mix an advantage

Maanshans balanced product mix allows the

company a high degree of flexibility to adapt to

changing operating conditions. Management has

guided for a 20% uplift in train wheel

(Maanshans highest margin product) sales

volumes from 150kt in 2009 to 180kt in 2010e. In

the long term, Maanshans subsidiary, Hefei Iron& Steel, has commenced construction of a new

flat steel plant consisting of a 3mtpa hot strip mill

and a 1.5mtpa cold strip mill which should further

enable the company to improve its product mix.

We reiterate our OW(V) rating on Maanshan

given its attractive valuation. Trading at 0.8x PB

compared to its recent high of 1.6x and the sector

average of 1.2x, Maanshan stands out as one of

the cheapest steel plays in the region and remains

our preferred steel exposure in China.

Earnings changes

Maanshan earnings revisions


2010e 68,193 66,844 -2.0%2011e 70,319 71,371 1.5%2012e 64,954 64,959 0.0%


2010e 5,738 4,270 -25.6%2011e 6,158 6,088 -1.1%2012e 8,591 8,600 0.1%


2010e 3,421 2,445 -28.5%2011e 3,972 3,916 -1.4%2012e 5,882 5,887 0.1%


Valuation and risksWe maintain an OW(V) rating on Maanshan H

shares but reduce its target price to HKD4.5

(HKD6), based on 1.1x PB (1.3x PB) and 2010e

book value of HKD4.24/share. We arrive at a PB

of 1.1x from our residual income model (PB =

ROE-g/ COE-g) using a sustainable ROE estimate

of 13% (16%) in line with our forecast average

ROE over 2010-12. We reduce our target for the

A-shares toRMB4.5 (RMB5.5) as the A shares are

trading at a par with the H shares.

We consider Maanshans H- and A-shares

volatile. Under our research model, for China

stocks with a volatility indicator, the Neutral band

is 10 percentage points around our hurdle rate of

10% (or 0-20%). Our HKD4.5 target price for the

H-shares implies a potential return of 31%

(including dividend yield of 3.6%) from the

closing price of HKD3.53 on 16 June, which is

above the Neutral band. Our target price ofRMB4.5 for the A-shares implies a potential

return of 33.2% (including dividend yield of

3.2%) from the closing price of RMB3.46, which

is above the Neutral band.

Movement in steel prices represents a key downside

risk for the company. Any potential credit tightening

by the government, having an impact on stimulus

spending, represents a key downside risk, as

Maanshan, with its exposure to long steel, has been a

key beneficiary of the stimulus.

Maanshan: Key data

YE Dec Sales(RMBm)

NPAT(RMBm)

EPS(RMB)

PE(x)

PB(x)

Div yield(%)

ND/E(%)

EV/EBITDA(x)

FY09 50,412 392 0.05 60.7 0.9 1.3 55 6.7

FY10e 66,844 2,445 0.32 9.8 0.8 3.6 35 3.9FY11e 71,371 3,916 0.51 6.1 0.8 5.8 21 2.9FY12e 64,959 5,887 0.76 4.0 0.7 8.7 10 2.2


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China Steel (OW(V), TPTWD37)

Monthly stats indicate strong 1H10

Unlike other companies in our coverage universe,

China Steel (CSC) reports operating data and pre-

tax profit on a monthly basis. From its recently

released May data, we see ytd pre-tax profit at

TWD22.74bn. This run-rate is tracking marginally

ahead of our FY10 forecast of TWD47.2bn and

market consensus of TWD44.8bn. We continue tosee positive price momentum for the company,

with price hikes of 6.6% for CSCs July-August

deliveries on anticipated higher raw material costs

in SepQ10. We note that CSC product prices have

increased by almost one-third since the start of the

year. We believe CSC is well leveraged to a steel

cycle upswing with a robust near-term order book

and strong volume growth. With a 2010e dividend

yield of 8.1% compared to the sector average of

2.7%, the company is the highest dividend payer

in the region.

Earnings changes

CSC earnings revisions

Revenues (TWDm) Old New % Chg

2010e 242,916 248,209 2.2%2011e 271,657 279,897 3.0%2012e 303,572 303,899 0.1%

EBIT (TWDm) Old New % Chg2010e 43,726 37,993 -13.1%2011e 44,926 47,738 6.3%2012e 68,622 54,817 -20.1%Net Profit (TWDm) Old New % Chg2010e 42,266 37,666 -10.9%2011e 46,868 49,111 4.8%2012e 66,838 55,289 -17.3%


Valuation and risksWe reiterate our OW(V) on CSC but decrease our

target price to TWD37 (TW42), valuing the stock

at 1.8x PB (2.0x PB) and 2010e book value of

TWD20.8. We arrive at a PB of 1.8x from our

residual income model (PB = ROEg / COE-g)

using a sustainable ROE of 17%, in line with our

average forecast ROE of 17% over 2010-12.

We consider CSC stock volatile. Under our

research model, for Taiwan stocks with avolatility indicator, the Neutral band is 10

percentage points around the hurdle rate of 9.5%

(or -0.5-19.5%). Our NTD37 target price suggests

potential upside of 20.5% over the closing price

on 16 June of NTD30.70. Adding in the expected

8.1% dividend yield suggests a potential return of

28.7%, which is above the Neutral band.

The key risk to our valuation lies in the movement

of steel prices. The key downside risks are a

slowdown in the euro zone, which would

negatively impact steel consumption. On the raw

material side, movements in coal and iron ore

prices are risks. Successful execution of key

growth projects poses a further risk.

China Steel - Key data

YE Dec Sales(TWDm)

NPAT(TWDm)

EPS(TWD)

PE(x)

PB(x)

Div yield(%)

ND/E(%)

EV/EBITDA(x)

FY09 165,409 19,549 1.53 20.1 1.6 4.6 26 22.1

FY10e 248,209 37,666 2.92 10.5 1.5 8.1 16 8.7FY11e 279,897 49,111 3.80 8.1 1.4 10.6 8 6.9FY12e 303,899 55,289 4.28 7.2 1.3 11.9 2 5.9


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SAIL (OW(V), TP INR256)Top pick in the Indian steel space

SAIL is best placed vis--vis its peers on account of

its 100% iron ore integration in a rising cost

environment, in our view. We see the recent

correction in share price as an entry opportunity.

However, we expect price volatility in the near term

over concerns of timing of the FPO and its issue

price. InAsia Steel: Fear vs fundamentals dated 6

May, we mentioned that equity dilution at currentprices is not a concern and could actually be neutral

to marginally positive for the stock.

In the longer term SAIL has aggressive capacity

expansion plans to grow to 20.6mtpa by FY14

(March) from the current 12.6mtpa which will

provide it with strong operating leverage. That said,

we believe that the first phase of the expansion will

come on stream only in FY12 with IISCOs 2mtpa

expansion. We expect an incremental 2mtpa

capacity expansion in FY12-15.

Earnings changes

SAIL earnings revisions (INRm)

New Old Change

SalesFY11e 444,916 465,670 -4%FY12e 558,803 573,468 -3%EBITDAFY11e 124,593 145,121 -14%FY12e 165,134 180,655 -9%NPATFY11e 72,478 81,248 -11%

FY12e 97,204 102,469 -5%


Valuation and risksWe lower our target price to INR256 (INR272) as a

result of a 5% cut in our steel price forecasts. We

also marginally cut our volume estimates for SAIL

by 4%/ 3% in FY11/12 as we expect the volume

expansion to be back-ended.

We value SAIL on a blend of PB and

EV/EBITDA. Our PB multiple of 2.1x (same) is

derived from the residual income model,

assuming a long-term sustainable ROE of 25%(same). On EV/EBITDA methodology, we apply

a multiple of 6.5x (same) which is at a c10%

discount to the corresponding multiple for Tata

Steels India operations, given SAILs lack of

captive coking coal. Our PB and EV/EBITDA

derived fair values are INR243 and INR269

respectively. Accordingly, we derive a blended

target price of INR255, which at 16 June closing

price of INR198 offers 30.8% potential return

including dividend yield of 1.5%. The potentialreturn is above the Neutral band of 0.5-20.5% for

a volatile Indian stock with hurdle rate of 10.5%.

Key risk lies in the movement of steel and coking

coal prices as SAIL does not have captive coking

coal assets. Further, given the robust expansion plans

project execution also poses some risks.

SAIL: Key data

YE March Sales(INRm)

NPAT(INRm)

EPS(INR)

PE(x)

P/B(x)

Div yield(%)

ND/E(%)

EV/EBITDA(x)

FY09 437,545 55,389 13.41 14.8 2.9 1.6 -35 8.4

FY10e 366,802 66,661 16.14 12.3 2.4 1.4 -41 6.7FY11e 444,916 72,478 17.55 11.3 2.1 1.5 -20 5.9FY12e 558,803 97,204 23.54 8.4 1.7 1.6 -7 4.7


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Tata Steel (N(V), TP INR562)European operations still haunt

We remain Neutral (V) on Tata Steel given the

margin pressure in European operations due to

higher raw material costs as well as continuing

pressure on prices. Our European Steel Team

recently increased FY11 HRC prices by 3% and

reduced FY12 prices by 3% (seeEuropean Steel:

Dead money or a value opportunity? Why

patience will be rewarded, 7 June). While weexpect a full input cost pass-through in the case of

flat products, we believe the long segments (Tata

Steel Europe has 25% exposure) to come under

pressure. Further, any potential production cut

should inhibit upside from volume leverage on

account of high fixed cost of European operations.

Over the medium term, Indian operations, though

highly profitable, are unlikely to see the benefits

of ongoing expansion to 10mtpa (from 6.8mtpa)

until FY13. Given the high profitability of the

India operations (nearly 4x European

EBITDA/ton), delays in implementation of the

project could be incrementally negative.

Earnings changes

We lower our earnings by 4/11% for FY11/12 on

account of lower steel prices for the more profitable

India business as well as higher iron ore costs for

Corus which is not integrated. We also lower our

FY12 volume assumptions for both Europe (2%)

and India (3%) given delays in India expansion and

the uncertain volume outlook in Europe.

Tata Steel earnings revisions (INRm)

New Old Change

SalesFY11e 1,104,226 1,057,523 4%FY12e 1,144,443 1,191,676 -4%EBITDAFY11e 152,671 155,476 -2%FY12e 167,163 188,910 -12%NPATFY11e 47,538 49,268 -4%FY12e 59,235 66,523 -11%


Valuation and risksOur new target price for Tata Steel is INR562

(INR690). We value Tata Steel based on a 50-50

blend of PB and EV/EBITDA. We have revised

our long-term sustainable ROE assumption to

15% (17%) primarily given the uncertainty of

volume expansion in Europe and accordingly our

residual income derived PB multiple stands at

1.2x (1.4x). On EV/EBITDA methodology, we

value Tata Steel on a SOTP basis with multiples

of 7x, 4.5x and 2x for the Indian, European and

other Asian operations, respectively. Our PB

derived fair value of INR548 and EV/EBITDA

derived fair value of INR576 blend into a target

price of INR562. Our target price implies a

potential return of 17% (including 1.4% dividend

yield) over the closing price of INR486 on 16

June, which is within the HSBC Neutral band of

0.5-20.5% for a volatile Indian stock which has a

hurdle rate of 10.5%.

Key risks include steel prices for an almost input

cost neutral Tata Steel India, while demand,

utilization, pricing and input cost issues form key

risks for the European operations.

Tata Steel: Key data


NPAT(INRm)

EPS(INR)

PE(x)

P/B(x)

Div yield(%)

ND/E(%)

EV/EBITDA(x)

FY09 1,475,949 49,509 56.02 8.7 1.5 3.3 188 4.9

FY10 1,035,790 -20,092 -22.66 nm 1.3 1.6 151 9.4FY11e 1,104,226 47,538 53.61 9.1 1.2 1.4 138 5.6FY12e 1,144,443 59,235 66.80 7.3 1.1 2.7 125 5.0

Note: Ratios based on closing price as on 16 June 2010

Source: Company data, HSBC estimates

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JSW Steel(OW(V), TP INR1,280)

Flying high

We keep JSW at OW(V) given its volume leverage,

product mix and better cost structure over the

medium term from captive iron ore and coking coal.

Given the above-average earnings growth, strong

operating leverage and expansion in margins, we

believe current valuations are not demanding.

Moreover, JSW has signed an MOU with JFEthrough which JFE could potentially take a minority

stake in JSW as well as partner JSW for its 10mtpa

greenfield project in West Bengal. We believe that if

the JFE tie-up goes through, then it could lead to a

further re-rating of the stock.

JSW has recently commissioned first phase of its

Hot Strip mill which will enable it to produce higher

margin products. Further, we expect the additional

3.2mtpa of crude capacity at Vijaynagar to come on

stream by March 2011. Over the medium term,

JSWs focus on raw material integration is positive

as it should help to improve its cost structure.

JSW expects to produce c8mt of incremental iron

ore from captive sources in Karnataka and Chile

within the next 18-24 months. Commissioning of the

beneficiation plant at Vijaynagar will also allow use

of cheaper low grade ores. On the coking coal front,

the company recently acquired coking coal mines in

the US. These mines have resources totalling 123mt

and JSW expects 1mtpa of production starting

September 2010, which could ramp up to c3mt over

the next two years with FOB cost of cUSD100/t

(currently USD205/t).We have not factored these

improvements in raw material linkages given

execution slippages in the past.

Earnings changes

JSW Steel earnings revisions (INRm)

New Old Change

SalesFY11e 258,250 260,422 -1%FY12e 323,617 326,944 -1%EBITDAFY11e 52,277 55,992 -7%FY12e 71,721 80,328 -11%NPATFY11e 17,758 19,405 -8%FY12e 27,346 31,783 -14%


Valuation and risks

We lower our TP to INR1,280 (INR1,460) due to

earnings estimates cuts. We value JSW on a 50-50

blend of PB and EV/EBITDA. Our PB multiple of

1.9x (same) is derived from the residual income

model assuming a long-term sustainable ROE of

24% (same), while our EV/EBITDA multiple of6.0x (same) is at a 10% discount to SAIL due to its

lower backward integration. Our PB derived fair

value of INR1,240 and EV/EBITDA derived fair

value of INR1,318 blend into our target price of

INR1,280. The potential return of 22.4% includes

dividend yield of 1.3% over the closing price of

INR1057 on 16 June and is above HSBCs Neutral

band of 0.5-20.5% with hurdle rate of 10.5%.

Any upward movement in steel prices and

downward movement in iron ore and coking coal

prices are positive for the stock. Tie-up with JFE

Steel is a key near term trigger.

JSW Steel: Key data


NPAT(INRm)

EPS(INR)

PE(x)

P/B(x)

Div yield(%)

ND/E(%)

EV/EBITDA(x)

FY10 189,572 15,637 83.62 12.6 2.1 0.9 221 9.8

FY11e 258,250 17,758 94.96 11.1 1.8 1.3 183 7.5FY12e 323,617 27,346 146.23 7.2 1.5 2.1 150 5.4FY13e 328,049 29,397 157.20 6.7 1.3 2.2 133 4.9


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Bluescope (OW(V), TP AUD3)Currency moves a positive

We keep our OW(V) rating on Bluescope (BSL),

noting that valuation remains attractive. In our view,

BSLs vertically integrated business model provides

leverage to improved operating conditions.

BSL is a direct beneficiary of recent currency

moves, with USD appreciation strengthening the

dollar contribution of its US-based divisions

(Coated and Hot Rolled productions), which

account for c25% of 2010e revenues. In addition,

a weakening AUD increases the companys

pricing competitiveness. We believe the key near-

term catalyst will be the FY10 results due in mid

August. Management has guided for a small

profit, encouraged by continued improvement in

domestic/export demand, resilient steel prices and

internal cost reduction initiatives.

Earnings changesBlueScope earnings revisions

Revenues (AUDm) Old New % Chg

2010e 9,655 9,954 3.1%2011e 12,042 13,617 13.1%2012e 12,499 13,426 7.4%EBIT (AUDm) Old New % Chg2010e 231 233 1.1%2011e 664 771 16.1%2012e 869 881 1.3%Net Profit (AUDm) Old New % Chg2010e 93 93 -0.5%2011e 401 465 15.9%2012e 545 548 0.6%


Valuation and risks

We maintain our rating at Overweight (V) but cut

our target price to AUD3 (AUD3.5) based on PB

of 0.9x (1.1x) and its FY11e book value of

AUD3.27/share. We arrive at a PB of 0.9x from

our residual income model (PB = ROE-g/COE-g)

using a sustainable ROE of 10% (11%).

We consider BlueScope stock volatile. Under our

research model, for Australia stocks with a

volatility indicator, the Neutral band is 10percentage points around the hurdle rate of 9.5%.

Our AUD3 target price suggests potential return

of 27.7% over the closing price on 16 June of

AUD2.35. Adding in the expected 1.7% dividend

yield suggests a potential return of 29.4%, which

is above the Neutral (V) band.

Movement in steel prices remains the key risk for

the company. Our FX Research Team

substantially lowered its AUD/USD to 0.85 for

2010-11 (from 0.95 and 1.00 respectively) in its

10 June 2010 Currency Outlookreport. This was a

key driver in increasing our BSL earnings

estimates. Any currency appreciation over

forecast poses a downside risk.

BlueScope Steel - Key data

YE Jun Sales(AUDm)

NPAT(AUDm)

EPS(AUD)

PE(x)

PB(x)

Div Yield(%)

ND/E(%)

EV/EBITDA(x)

FY09 10,333 56 0.06 39.1 0.8 2.1 13 9.1

FY10e 9,954 93 0.05 46.1 0.8 1.7 16 8.7FY11e 13,617 465 0.25 9.2 0.7 5.5 13 4.4FY12e 13,426 548 0.30 7.8 0.7 6.4 11 4.0


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Disclosure appendix

Analyst Certification

The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the

opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their

personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific

recommendation(s) or views contained in this research report: Daniel Kang, Jatin Kotian, Sarah Mak and Lun Zhang

Important disclosuresStock ratings and basis for financial analysis

HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which

depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations.

Given these differences, HSBC has two principal aims in its equity research: 1) to identify long-term investment opportunities

based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon;

and 2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative,

technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating.

HSBC has assigned ratings for its long-term investment opportunities as described below.

This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when

HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at

www.hsbcnet.com/research. Details of these short-term investment opportunities can be found under the Reports section of thiswebsite.

HSBC believes an investor's decision to buy or se

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