Asia Steel - 3Q 2010

Global Natural Resources
Asia Metals & Mining

abc
Global Research
Asia Steel  Sentiment to improve as output cuts

take effect and steel prices stabilise
3Q to signal bottom
 High costs, softer demand to challenge
3Q but medium-term outlook still robust
HSBC Asia Steel sector ratings and target prices
Company Code Ccy Last New Prev Pot’l Rating  Sector oversold: POSCO top pick and
price TP TP rtn (unchg) HSBC Asia Super 10 idea
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) Seasonally weaker 3Q season approaches but prices
Baosteel 600019 RMB 6.13 8.00 9.00 34% OW (V) bottoming. Underlying demand has remained resilient but
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) sentiment has been affected by China’s property clampdown
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) and European debt concerns. In turn, inventory liquidation and
China Steel 2002 TWD 30.70 37.00 42.00 29% OW (V) consumers ‘sitting on their hands’ have pushed prices down. In
SAIL SAIL INR 198 256 272 31% OW (V)
Tata Steel TATA INR 486 562 690 17% N (V) our view, these concerns have been overplayed and we believe
JSW Steel JSTL INR 1057 1,280 1,460 22% OW (V)
BlueScope BSL AUD 2.35 3.00 3.50 29% OW (V)
steel prices may soon stabilise given that prices are now below
OW = Overweight, N = Neutral, UW = Underweight; V = Volatile (see disclosure appendix)
the cost of marginal production, which should trigger supply
Source: Bloomberg, HSBC. Prices as at close of 16 June 2010
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
18 June 2010 position and operate at near full capacity. These conditions have
Daniel Kang * historically corresponded with higher profit margins.
Regional Head of Metals & Mining, Asia-Pacific
The Hongkong and Shanghai Banking Corporation Limited 3Q margin squeeze likely — lowering 2010 forecasts. With
+852 2996 6669 danielkang@hsbc.com.hk spot Asian HRC steel prices having corrected 12% (USD85/t)
Jatin Kotian * since recent highs, 3Q has begun weaker than our expectations.
Analyst For 2010, we reduce steel price forecasts by 5%, leading to
HSBC Securities and Capital Markets (India) Private Limited
+9122 2268 1638 jatinkotian@hsbc.co.in
average EPS downgrades of 13% in 2010 but largely maintain
2011 forecasts. Against consensus, our revisions place us 7%
Sarah Mak *
Analyst below 2010 but 9% ahead of 2011 estimates.
The Hongkong and Shanghai Banking Corporation Limited
+852 28224551 sarahmak@hsbc.com.hk Valuations below trend, now cheaper to buy than build. We
believe the market is pricing in an unlikely bearish scenario
Lun Zhang*
Analyst with implied ROEs below historical trend, and regional
The Hongkong and Shanghai Banking Corporation Limited valuations (EV/t of USD931) are now below replacement cost
+852 2996 6569 lunzhang@hsbc.com.hk (USD1,036/t). We remain attracted to Indian names that offer
Amit Pansari*, CFA highest raw material self-sufficiency (SAIL is our top pick in
Associate, Bangalore India). In our view, Chinese steel stocks are oversold.
View HSBC Global Research at: http://www.research.hsbc.com Catalysts — steel prices to bottom. We believe the key near-
*Employed by a non-US affiliate of HSBC Securities (USA) Inc, term catalyst is a bottoming in steel prices. Upcoming 2Q
and is not registered/qualified pursuant to FINRA regulations
earnings should be solid but this is largely priced in; 3Q outlook
Issuer of report: The Hongkong and Shanghai Banking
Corporation Limited statements will likely be cautious given recent price cuts. This
should prove to be the bottom as we expect recovery in steel
Disclaimer & Disclosures prices in 4Q as cost pressures ease.
This report must be read with the
disclosures and the analyst certifications
in the Disclosure appendix, and with the
Disclaimer, which forms part of it
Asia Metals & Mining abc
18 June 2010
Valuation and key changes

HSBC 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% na
Tata Steel INRm 47,538 59,235 na -4% -11% na 337% 25% na
JSW 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 forecasts
HRC - 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 JSW Steel, 2010e represents March 2011.
2
18 June 2010
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
The Asian Steel sector has been a major casualty notwithstanding lower iron ore and coal prices in
of market risk aversion in 1H10. Stocks under our recent months, the current quarterly contract
coverage have fallen by 25% ytd on average (China pricing system (based on three-month spot lag)
stocks faring worse, down 40%). While sentiment suggests an increase in 3Q raw material contract
may remain weak in the near term, we believe steel prices. Combined with the traditional 3Q weaker
prices may soon bottom given prices are now below demand season approaching, we lower sector EPS
costs, which should trigger increasing production by an average of 13% in 2010, placing us 7%
cuts. We stick to our medium-term view that Asia below consensus estimates.
should remain tightly balanced, shift into a net
That said, we believe 3Q will mark the bottom for
importer position and operate at near full capacity.
profits as prices are now below cash costs of
With valuations now below trend levels and
production which has triggered production cuts. We
replacement costs, we reiterate our bullish stance
believe inventories remain at normal levels. In
on Asia Steel.
addition, whilst seasonality will impact 3Q demand,
HSBC Asia Steel coverage ytd price performance it should also assist demand recovery in 4Q.
JSW Steel 5%
China Steel -7% With current valuations implying below trend
SAIL -16% ROE in addition to replacement costs, we believe
NSC -17%
Tata Steel -21% the sector has been oversold. Within our coverage
JFE -22% universe, POSCO continues to rank best in our
POSCO -24%
sector scorecard.
Bluescope -27%
Maanshan A -31%
Baosteel -37%
Maanshan H -38%
Angang H -42%
-52%
Angang A
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,
3
18 June 2010
Supply cuts under way production cuts from the small mills in the near term
as they continue to make losses at current prices.
With current domestic Chinese HRC spot prices at
According to China Securities Journal rolling mills
RMB4,200, we believe the majority of Chinese
in northern China are estimated to be running at less
capacity is now operating in losses. This should
than 50% of capacity.
trigger supply cuts from producers, which we
believe is under way. According to World Steel China marginal producers profitability at spot steel and raw
material prices (ex-VAT)
Dynamics (WSD), average HRC production cash
RMB/t
cost in China (with VAT) is RMB4,250/t.
Iron ore 1,627
China average HRC production cost (RMB/t) Coking coal 942
Rolling 1,000
RMB/t Transport 135
Cost 3,704
Iron ore 1,775
HRC price 3,573
Coking coal 704
Profit/ (loss) -132
Scrap 205
Energy 591 Source: HSBC, SBB, Bloomberg
Labour 184
Freight 327
Others 464 Further, with the weakness in steel prices but still
Total 4,250
high raw material contract prices we believe the
Source: World Steel Dynamics
larger steel mills will face margin squeeze in 3Q
and will be forced to reduce output. Baosteel
A slowdown in production rate is already evident in
Chairman Xu Lejiang has been quoted by Metal
China’s May crude steel production numbers. Crude
Bulletin saying that “Chinese steelmakers will cut
steel output in China slowed down to 1.81mtpd in
production or bring forward maintenance in 3Q on
May from the record 1.85mtpd run-rate achieved in
weak demand”.
April 2010. According to CISA production rates
continued to slow down from 1.85mtpd in the first Steel traders in China expect large producers to start
10 days to 1.80mtpd in the next 10 days and further maintenance from July as the mills cannot afford to
to 1.78mtpd in the last 10 days of May. bear high costs during a seasonally weak 3Q.
China average daily crude steel production rates (mtpd)
Furthermore, they note that producers have not yet
started to cut output as traders now bear the losses
1.90
instead of producers. However, if spot market prices
1.80
continue to fall, steelmakers will have to refund
1.70
traders in the end and will have to bear the loss
1.60
which will force them to cut output.
1.50
According to WSD, average HRC production cash
1.40
cost in the World ex-China is USD647/t. With
1.30
current Asian HRC spot prices at cUSD625/t
Oct-09
Dec-09
Jan-09
Feb-09
Mar-09
Apr-09
Jun-09
Jul-09
Aug-09
Sep-09
Jan-10
Feb-10
Mar-10
Apr-10
May-09
Nov-09
May-10
more than 50% of the capacity is under losses. We

believe this will trigger a supply response from
Source: HSBC, NBS, CISA
the regional producers.
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
4
18 June 2010
World exChina average HRC production cost (USD/t) This corresponds to the demand for finished steel
USD/t where it has grown by an average 14% in 2Q over
Iron ore 205 2006-09. Based on the demand run rate in April-
Coking coal 114
Scrap 56 May we estimate sequential finished steel
Energy 76 consumption growth of 10% in 2Q.
Labour 68
Freight 60
Others 68 Average q-o-q growth for end user and apparent crude steel
Total 647 consumption in 2006-09 vs 2010
Source: World Steel Dynamics _ Average 2006-2009___ _______ 2010_________

Apparent End user Finished End user
crude steel demand steel
Outside China also mills have hinted at reducing demand
output give weak market conditions. POSCO has 1Q 2% -12.2% -2% -13.3%
2Q 14% 32.7% *10% *22.3%
already announced that it will be undertaking a 3Q -2% -3.1%
scheduled relining of its No 4 blast furnace with a 4Q 2% 25.4%
capacity of 3.2mtpa in Pohang during July- Source: HSBC estimates, CEIC, *Note: 2Q10 is estimated based on Apr-May run rate
September which will reduce 3Q crude steel

production by c200-300kt. Similarly Korea’s Steel prices to stabilise
Hyundai Steel has announced that it will reduce With prices below cash costs of production and
output in 3Q due to regular maintenance work supply cuts under way, we believe steel prices
which will last for around two weeks. SBB should soon bottom. We track Chinese steel mills
estimates that this will reduce Hyundai Steel’s 3Q and traders’ expectations of a likely price hike (as
output by 20% q-o-q. Dongkuk Steel has planned per a weekly survey by Mysteel, a Chinese steel
maintenance shutdown for its rolling mills in 3Q. industry source) with steel prices. We can see that
while price hike expectations reached 'trough' levels
Demand seasonality – 3Q
in early June (less than 10% of those surveyed
pain before 4Q gain
expect a weekly price hike), there has been a
As detailed in our China Metals & Mining Monitor stabilisation and slight upturn in recent weeks.
– The eye of the tiger dated 26 February 2010, we
Mysteel survey of steel traders and steel mill
note that 2Q has traditionally been the strongest for
metal demand in China as indicated by the robust 70% 4,650
60% 4,500
pick-up in end user activities across construction,
50% 4,350
transport, power, consumer goods and other 40% 4,200
manufacturing sectors. We have observed that there 30% 4,050
is a strong sequential pick-up in demand from these 20% 3,900
10% 3,750
sectors in 2Q with average growth of 33% over
0% 3,600
2006-09 while demand slows down in 3Q before
Feb-10
Jan-10
Mar-10
Apr-10
May-10
Jun-10
bouncing back again in 4Q. For 2010 we have

observed a similar pattern with demand in 1Q HRC Prices - RMB/t (RHS) Hike (LHS)
declining 13% q-o-q on average. Using the April- Source: Mysteel
May run rate for the end user activities we estimate

sequential growth of 22% in 2Q.
5
18 June 2010
Oversold — Valuations below Asia Steel EV/t of capacity
trend and replacement costs 1,600

1,400
In our view, recent market concerns over China
1,200
USD/t
property clampdown and the European crisis have 1,000
been overplayed. 800
600
As detailed in our China Metals & Mining Monitor – 400
Property crackdown in focus dated 6 May 2010 we
May-05
May-08
May-09
May-03
May-04
May-06
May-07
May-10
believe there is little evidence thus far to suggest that
property sector demand has slowed in China. Year to Average USD950/t Spot USD931/t
May, domestic construction completions were up
Source: Bloomberg
18% yoy while construction starts were up 72% yoy.
Given the 18-24-month construction period for Asia Steel companies EV/t of capacity
typical projects, we believe underlying construction
EV/t of Capacity (USD/t)
demand will remain firm (albeit slowing). The
POSCO 826
government’s roll-out of affordable housing should Nippon Steel 1155
JFE Holdings 1040
also provide some offset to lower private investment. Baosteel 794
Angang - A 641
With respect to Europe, as detailed in our China Angang - H 641
Maanshan - A 335
Metals & Mining Monitor – From overheating to Maanshan - H 335
slowdown fears dated 4 June, we see that Europe China Steel 1096
SAIL 1134
only accounted for 14% of 2009 global steel Tata Steel 689
JSW Steel 1098
demand compared to China’s 46%. We do not Bluescope 634
believe a European slowdown will have a major Average 931
Source: HSBC
impact on global steel consumption. Our scenario
analysis suggests that if European demand growth
New capacity costs
falls flat versus our base case of 24% in 2010,
Company Project Country Project Capacity Capex Capex/t
then this will reduce our global demand forecast Type (mtpa) (USDbn) (USD)
by just 3% to 1.23bt. China Steel Dragon steel Taiwan Greenfield 2.5 2.8 1,139
BF #2
China Steel Dragon steel Taiwan Greenfield 2.5 2.5 1,000
Valuations below replacement costs BF #1
Angang Bayuquan China Greenfield 5.0 4.2 848
Valuations (EV/t) for the stocks under our Hyundai Steel BF #1 and #2 Korea Greenfield 4.0 4.7 1,168
Baosteel Zhanjiang China Brownfield 5.0 5.1 1,026
coverage have fallen by an average 22% from the Average 1,036
current year peak of USD1,200/t in January to Source: HSBC
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).
6
18 June 2010
2010 quarterly forecasts  POSCO’s strong balance sheet, diverse

We estimate 3Q to be the trough for earnings for high-end product mix and low-cost
companies under our coverage as they are hit by a operations remain attractions for a
double whammy of rising raw material costs and quality, defensive regional steel leader.
weak steel prices. We expect margins to rebound in
 We believe Maanshan has attractive
4Q as both factors turn around and increasing steel
valuations, trading at 0.8x PB compared
prices are accompanied by lower raw material costs.
to its recent high of 1.6x and the sector
Asia steel companies quarterly NPAT forecasts average of 1.2x.
Company Unit Mar 10 Jun 10 Sep 10 Dec 10
 We like Baosteel for its leverage to
POSCO KRW bn 1,437 1,406 992 1,093
Nippon Steel JPY bn 34 44 25 41 resilient domestic appliance demand
JFE JPY bn 47 53 27 47 given its dominant market position.
Baosteel RMB mn 3,930 1,945 1,170 2,035
China Steel TWD mn 11,054 10,960 7,227 8,426
Angang RMB mn 1,152 1,414 315 1,423  Angang has a raw material advantage,
Maanshan RMB mn 521 879 302 743
SAIL INRm 20,849 20,207 17,285 16,269
with a favourable iron ore pricing
TATA INRm 24,052 17,681 14,677 13,947 arrangement with its parent which should
JSW INRm 7,170 5,924 3,952 4,713
ensure a cost advantage during an iron
Source: HSBC estimates
ore upswing.
What's in the price? Below trend valuations  We like China Steel for its volume
We believe the market is now pricing in an unlikely growth and high dividend yield.
bearish scenario with implied ROEs below historical
trend. At current prices, we estimate the implied  SAIL has 100% self-sufficiency in iron
ROEs for our preferred steel names (POSCO, ore and thus is largely protected from
Maanshan, SAIL, Baosteel) are materially below price increases.
their respective historical ROEs. For full details,  We like JSW Steel for improving iron ore
please refer to the relevant table on page 8. integration and volume leverage. Further,
Sector scorecard summary if the tie-up with JFE goes through, this
We first introduced our sector scorecard on 19 June could lead to a potential rerating.
2009. The aim of the scorecard is to assist in refining  BlueScope remains one of the cheapest
the stock selection process, with the full table stocks in the sector, trading at 0.7x 2010e
detailed on the following page. Under this system, PB against the sector average of 1.2x. We
POSCO, SAIL and Maanshan rank best, while believe the company is a direct
Nippon Steel, JFE and Tata Steel rank among the beneficiary of recent currency revisions
worst. We note that these results are consistent with by our FX Research Team.
our PB-ROE valuation methodology.
 We keep JFE, NSC and Tata Steel at N(V).
Stock-specifics
 We reiterate our OW(V) ratings on POSCO,
Maanshan, Baosteel, Angang, China Steel,
SAIL, JSW and BlueScope.
7
18 June 2010
What’s 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 1.2
CoE 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 2.35
Currency KRW JPY JPY RMB HKD HKD TWD INR INR INR AUD
Financial 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-11
BV/share 460,000 300 2,931 5.55 8.85 4.24 20.8 115 457 694 3.27
Current PB 1.0 1.1 1.0 1.1 1.1 0.8 1.5 1.7 1.1 1.5 0.7
Implied 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 0.9
Price (derived) 598,000 361 3,370 7.76 11.33 4.45 37.48 243 548 1318 2.94
HSBC target 600,000 360 3,350 8.00 12.00 4.50 37.00 256 562 1280 3.00
Upside / (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 19.5
HSBC 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 3.50
Previous 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 score
20% 10% 20% 20% 30% 100%
1 Posco 2.0 4.0 4.0 2.5 1.7 2.6
2 SAIL 1.0 1.0 4.0 1.5 9.7 4.3
3 Maanshan 6.0 10.0 6.3 5.0 2.0 5.1
4 Bluescope 4.0 4.0 7.3 10.0 2.7 5.5
5 China Steel 3.0 9.0 6.7 3.0 8.3 5.9
6 Angang 8.0 8.0 6.3 7.0 5.0 6.6
7 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 6.8
9 Nippon 7.0 2.0 6.7 10.0 7.3 7.1
10 Tata Steel 10.0 3.0 6.0 8.0 7.7 7.4
11 JFE 9.0 7.0 8.7 8.5 6.3 7.8
8
18 June 2010
Asia Steel performance table

Stock and commodity performances ytd, as at 16 Jun 2010
Unit Spot 1M 3M 6M 1Y y-t-d Peak Date of Spot vs Trough Date of Spot vs
price peak peak price trough trough
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 indices
Korea 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%
Currencies
JPY: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 prices
Steel
China 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%
Bulks
Iron 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 inventory
Steel
Long 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%
Bulks
Iron 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
9
18 June 2010
HSBC Asia Steel valuation table

HSBC 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 19,295
Nippon Steel JPY 318 23,620 31 5 16 31 36 7 3 3 6 8
JFE Holdings JPY 2,986 20,020 360 149 256 355 379 98 38 59 82 88
Baosteel RMB 6.13 15,712 0.37 0.33 0.52 0.71 0.74 0.18 0.20 0.20 0.32 0.33
Angang - A RMB 7.76 6,984 0.41 0.10 0.59 1.18 1.17 0.21 0.06 0.30 0.59 0.58
Angang - H HKD 9.91 1,381 0.41 0.10 0.59 1.18 1.17 0.21 0.06 0.30 0.59 0.58
Maanshan - A RMB 3.46 3,022 0.10 0.05 0.32 0.51 0.76 0.00 0.04 0.11 0.18 0.27
Maanshan - H HKD 3.53 785 0.10 0.05 0.32 0.51 0.76 0.00 0.04 0.11 0.18 0.27
China 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 3.05
Tata Steel INR 486 9,210 82.81 -2.99 34.54 63.50 99.53 15.98 9.99 6.94 11.53 13.17
JSW Steel INR 1,057 4,228 32.07 65.94 92.13 133.42 154.46 4.25 7.38 13.06 20.01 23.16
BlueScope AUD 2.35 3,702 0.92 -0.61 0.14 0.37 0.23 0.29 0.00 0.07 0.19 0.11
Total 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 RMB
Source: Company data, HSBC estimates
10
18 June 2010
HSBC Asia Steel valuation table

HSBC 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%
11
18 June 2010
Contents
3Q to signal bottom 3
Supply 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 – prices

down, costs up 13
Company Summaries 17
POSCO (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
12
18 June 2010
3Q margin squeeze –
prices down, costs up
 Reduce 2010 steel price forecast by 5% to reflect weak spot
prices and poor market sentiment
 China’s 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
Lowering steel price forecast by 5% while Steel Business Briefing (SBB) reports that
POSCO is considering a quarterly price increase
We continue to believe that steel demand in the
to reflect higher raw material costs. At the same
region remains robust and expect regional markets to
time, China Steel Corp announced a price hike of
remain tight. However, given the macroeconomic
an average 6.6% for its July shipments.
concerns surrounding China’s overheating property
sector and the sovereign debt crisis in Europe, Since recent peaks in mid-April, HRC prices have
market sentiment has been hit hard, leading to a fallen 8.5% while Rebar has suffered a 12% fall.
negative flow-on effect for regional steel prices. As a However, we believe domestic steel prices in China
result, we cut our 2010 steel price estimates by 5% have reached stable support levels, with spot prices
to fully reflect this period of spot market weakness. below industry average costs of production.
HSBC 2010e steel price forecast changes We calculate current HRC production costs in
Old New Chg
China to be RMB3,704/t (ex VAT), based on spot
Asia (USD/t)
domestic iron ore and coking coal prices. Given
HRC 688 652 -5%
Rebar 649 612 -6% that spot HRC prices are RMB3,573/t (ex VAT),
China (USD/t) the average domestic commodity grade HRC
HRC 670 641 -4%
Rebar 650 610 -6%
producer is making a loss of RMB132/t. We
Source: CRU, HSBC estimates believe this provides a floor to HRC prices and
historically, prices have rebounded strongly after
Chinese mills under our coverage have already falling below cost of production levels.
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
13
18 June 2010
China HRC production cost In order to test this pricing methodology, we use
RMB/t the Metal Bulletin/Bloomberg China Iron ore
Iron ore 1,627 fines price as our base index. Based on the
Coking coal 942
Rolling 1,000 guidelines, we calculate the Dec 09 to Feb 10
Transport 135 average price was USD129.80/t (on a 66% grade
Cost 3,704
HRC price 3,573 CFR basis). Taking the average Brazil-China
Profit/ (loss) -132
freight rate of USD30.11/t over the same period,
Source: HSBC, SBB, Bloomberg
we derive a VALE JunQ10 contract price of
USD99.69/t (on a FOB basis). This compares
China HRC prices and production cost
favourably to press reports (Bloomberg, Reuters)
5,300
in mid-April 2010 that suggested VALE agreed
4,800
on JunQ10 contract prices of cUSD100-110/t.
4,300
3,800 Metal Bulletin notes that while BHP and RIO
3,300
have not revealed their pricing formulae, it
2,800
2,300
believes that both companies use a pricing
mechanism based on the full preceding quarter.
Dec-07
Dec-09
Dec-08
Jun-07
Sep-07
Mar-08
Jun-08
Sep-08
Mar-09
Jun-09
Sep-09
Mar-10
Jun-10
Therefore, JunQ10 pricing uses an index average

HRC production cost HRC price ex VAT
for the 1 Jan to 31 Mar 2010 period. As done
previously, we use the Metal Bulletin/Bloomberg
Source: HSBC, Bloomberg, SBB
China Iron ore fines price as our base index and
Raw material prices derive a Jan-Mar average CFR price of
USD133.64/t. With Australia-China freight rates
It has been widely accepted by the market that the averaging USD10.64/t over this period, we arrive
traditional annual benchmark pricing mechanisms at a BHP/RIO JunQ10 FOB fines prices of
for bulks (iron ore and coking coal) have been USD123/t. Once again, this compares favourable
done away with. Towards the end of MarQ10, the to press reports (Reuters) that indicated a likely
major miners (VALE, BHP and RIO) all but JunQ10 price settlement of USD120/t.
confirmed a structural shift to quarterly contract
pricing, although there is limited transparency Given we have established the Metal Bulletin
with respect to the negotiations process. pricing methodology as a fair indicator for
quarterly iron ore pricing, we calculate indicative
Pricing for quarterly iron ore VALE, BHP/RIO SepQ10 pricing outcomes.
Metal Bulletin has attempted to derive the
quarterly iron ore pricing methodology for both Iron ore pricing on a FOB basis (USD/t)
VALE and BHP/RIO. JunQ10 SepQ10e Spot QoQ % Vs Spot %
VALE’s pricing methodology is more transparent VALE 105.00 146.16 132.51 39% -9%
BHP/RIO 120.00 157.44 139.54 31% -11%
as it uses the average prices index (chosen at the Note: Spot pricing is based on 14 June 2010.
Source: Bloomberg, Metal Bulletin, HSBC estimates
customer’s discretion) for the three-month period
directly proceeding the month before the quarter
in question. Therefore, JunQ10 contracts (for
April, May, June) are priced to the average of
index prices from 1 Dec 2009 to 28 Feb 2010.
14
18 June 2010
It can be seen that the indicative VALE and Pricing for quarterly coking coal
BHP/RIO SepQ10 prices represent a 39% and 31% The mechanisms surrounding coking coal pricing
q-o-q increase to the market speculated JunQ10 are just as, if not more, opaque as iron ore. The
contract prices. This is in line with the view amongst structural shift from an annual benchmark price
various regional steel companies (POSCO, Baosteel, has meant that JunQ10 pricing was agreed at
China Steel), who all concede that SepQ iron ore USD200/t, a 55% increase to the 2009 annual
pricing will most likely be higher than JunQ levels. pricing level of USD129/t. Recent media reports
The key issue will be the magnitude of a possible (Bloomberg, Reuters) suggest that BHP
quarterly increase. We believe there is a risk that Mitsubishi Alliance (BMA) are in negotiations
steel mills are unlikely to agree to provisional with major Japanese steel mills over SepQ10
contract pricing while it remains at a premium to coking coal price settlements, with indicative
spot prices. We note that spot market purchases are pricing being USD225/t (12.5% q-o-q increase).
currently at a c10% discount to like-for-like derived
SepQ10 pricing levels.
15
18 June 2010
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
16
18 June 2010
Company Summaries
17
18 June 2010
POSCO (OW(V), TP Valuation and risks

KRW600,000) We reiterate our OW(V) rating and reduce our
target price to KRW600,000 (KRW650,000),
Remains the regional leader
valuing the stock at 1.3x PB (1.4x) and 2010e
We continue to view POSCO as the pick of the
book value of KRW460,000 per share. We arrive
sector, with its strong balance sheet, diverse high-
at a PB multiple of 1.3x from our residual income
end product mix and low-cost operations making
model (P/B= ROE-g/COE-g) using our 2010-12
it stand out amongst its regional peers. In a recent
forecast ROE of 16% (17%).
HSBC hosted conference in early May 2010,
management noted market conditions were robust We consider POSCO stock to be volatile. Under
and the company was running at full production our research model, for Korean stocks with a
capacity. volatility indicator, the Neutral band is 10
percentage points around the hurdle rate of 10.5%
In mid-May, according to Reuters POSCO was
(or 0.5-20.5%). Our KRW600,000 target price
confirmed as the preferred bidder for the
implies upside of 27.1% over the closing price on
controlling stake in Daewoo International for a
16 June of KRW472,000. Adding in the 2.7%
reported offer price of USD3bn (cKRW3.4trn).
dividend yield implies a potential return of 29.8%.
We see the completion of this proposed
As such, we maintain our OW(V) rating.
transaction as a key near-term catalyst, being
strategically and financially positive. The The upside and downside risks for POSCO lie in
company has stated that it expects the deal to be the movement of steel prices. The key downside
finalised in 2H10. risks are a more severe slowdown in the US or
China, which in turn would negatively impact
Earnings changes
steel consumption growth. On the raw material
POSCO earnings revisions
side, movements in iron ore, coal and nickel
Revenues (KRWbn) Old New % Chg
prices provide additional risk.
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%
POSCO: key data

YE Dec Sales NPAT EPS PE PB Div Yield ND/E EV/EBITDA
(KRWbn) (KRWbn) (KRW) (x) (x) (%) (%) (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 4.5
FY11e 37,827 6,204 80,931 5.8 0.9 3.4 -9 3.2
FY12e 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 2010
18
18 June 2010
Nippon Steel (N(V), TP Valuation and risks

JPY360) We keep a Neutral (V) rating for NSC and
Price hike a positive, but fairly valued maintain our target price at JPY360, valuing the
stock at 1.2x (same) PB in line with its two-year
Our previous uncertainty over the ability of the
historical average and FY11e book value of
company to effectively pass on higher raw material
JPY300/share. We arrive at a PB of 1.2x from our
costs to downstream customers has eased, with
residual income model (PB = ROE-g/COE-g)
confirmation that NSC has reached an agreement
using a sustainable ROE of 10% (same).
with Toyota to a 25% contract price hike
(+JPY20,000/t or USD219/t) for the six months to Our JPY360 target price suggests potential upside
September 2010. We note that this is the first price of 13.2% from the closing price of JPY318 on 16
increase between the two parties for two years and is June. Adding in the 1.3% dividend yield implies a
indicative that demand for high-end steel products potential return of 14.5%.
remains firm. This is supported by Bloomberg news
The key up and downside risk to our rating lies in
reports that Toyota and its rival automaker Nissan
the movement of steel and raw material prices.
have plans to increase their respective global 2010
The likelihood of the Chinese government either
auto production by 1.7% to 7.4m units and 14.2% to
increasing or reducing steel export taxes also
3.75m units, respectively.
remains a risk. This in turn would impact the
That said at current levels, we see NSC as fairly regional market balance to which NSC sells c40%
valued and maintain our Neutral (V) rating. of its output and steel export prices. In addition,
the risk of further share market volatility and fund
Earnings changes
de-leveraging may also affect performance.
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.
NSC: key data

YE Mar Sales NPAT EPS PE PB Div Yield ND/E EV/EBITDA
(JPYbn) (JPYbn) (JPY) (x) (x) (%) (%) (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 8.9
FY12e 5,336 218 33 9.5 1.0 2.2 44 7.0
FY13e 5,017 240 37 8.7 0.9 2.5 38 6.2
19
18 June 2010
JFE (N(V), TP JPY3,350) Valuation and risks

Potential contract upside priced in We maintain JFE at Neutral (V) and reduce our
target price to JPY3,350 (JPY3,600), valuing the
With headwinds in the form of weak domestic
stock at 1.2x PB (same), in line with NSC’s
demand, rising costs and volatile currency still on the
valuation and FY11 (March) book value of
radar, we maintain our Neutral (V) rating on JFE.
JPY2,931. We arrive at a PB of 1.2x from our
On a brighter note, the company recently raised its residual income model (PB = ROE-g/COE-g)
HRC and CRC spot prices by JPY10,000/t (or using a sustainable ROE of 10% (same).
12% and 11% respectively) for Jul-Sep10
Under our research model, for Japanese stocks
deliveries. We believe that this is indicative of a
with a volatility indicator, the Neutral band is 10
future contract price hike, which is in line with
percentage points around the Japan hurdle rate of
domestic peers and management’s announced
7.5% (or -2.5-17.5%). Our JPY3,350 target price
flexible pricing formula to ensure quicker pass
suggests potential return of 14.6% (including div
through of raw material cost increases. That said,
yield of 2.4%) from the closing price of JPY2,986
we believe that potential contract price upside is
as on 16 June, which is within the N(V) band.
already priced in at current levels.
The key up and downside risk for the sector lies in
Earnings changes
the movement of steel prices; the region’s growth
JFE earnings revisions
in high-end steel capacity raises the threat of
Revenues (JPYbn) Old New % Chg
increased competition. The potential of the Chinese
2010e 3,490 3,477 -0.4%
2011e 3,665 3,674 0.3% government either to increase or reduce steel export
2012e 3,423 3,419 -0.1% taxes also remains a risk. This in turn would impact
EBIT (JPYbn) Old New % Chg
the regional market balance — to which JFE sells
2010e 336 310 -7.9%
2011e 340 335 -1.5% 50% of its output — and steel export prices. In
2012e 371 366 -1.3%
addition, the risk of further share market volatility
Net Profit (JPYbn) Old New % Chg
2010e 181 166 -8.5%
and fund de-leveraging may also affect the stock’s
2011e 198 195 -1.6% performance.
2012e 205 202 -1.5%
Note: 2010e represents March 2011 etc.
Source: HSBC estimates.
JFE: Key data

YE Mar Sales NPAT EPS PE PB Div yield ND/E EV/EBITDA
(JPYbn) (JPYbn) (JPY) (x) (x) (%) (%) (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 6.6
FY12e 3,674 195 368 8.1 0.9 2.8 77 6.0
FY13e 3,419 202 383 7.8 0.9 3.0 69 5.7
20
18 June 2010
Baosteel (OW(V), TP RMB8) Valuation and risks

Bottom in 3Q10, recovery in 4Q10 Baosteel’s position as China’s chosen national
champion, in our view, offers it leading status for
In a HSBC hosted investor call with Baosteel
consolidation opportunities and parent asset
management in mid June, the company noted that
injections. Baosteel is the domestic market leader
it saw a likely margin squeeze occurring in 3Q
and continues to benefit from exposure to
due to raw material price increases coupled with
automobile and appliance demand, with market
lower steel prices. That said, we expect a profit
shares of 50% and 37% in these respective
recovery in 4Q as raw material costs are pushed
sectors. We reiterate our OW(V) rating and
lower on increasing domestic supply.
reduce our target price to RMB8 (RMB9) based
We believe Baosteel is attractively priced at on 1.4x PB (1.5x PB) and 2010e book value of
current levels, particularly given its role as RMB5.55/share. We arrive at a PB of 1.4x from
national steel champion. In our opinion, domestic our residual income model (PB = ROE-g/COE-g)
steel prices are near the bottom, with spot prices using a sustainable ROE of 15%, in line with its
below cost of production, which should see 2002-09 historical average.
marginal producers cut output heading into 3Q. In
Under our research model, for stocks with a
addition, steel exports (which account for 8% of
volatility indicator, the Neutral band is 10ppts
Baosteel sales) should stay at high levels given
above and below our hurdle rate for Chinese
the international price premium.
stocks of 10% (or 0-20%). Our RMB8 target price
Earnings changes suggests potential return of 33.8% (including div
Baosteel earnings revisions yield of 3.3%) from the closing price of RMB6.13
Revenues (RMBm) Old New % Chg as on 16 June, which is above the N(V) band.
2010e 207,170 202,400 -2.3%
2011e 219,545 212,466 -3.2% The key downside risk, in our view, lies in the
2012e 235,268 227,648 -3.2% movement of steel prices. On the raw material
EBIT (RMBm) Old New % Chg
side, movements in coal, nickel, and iron ore
2010e 17,635 13,719 -22.2%
2011e 18,496 17,663 -4.5% prices provide additional risks. In particular,
2012e 19,313 18,293 -5.3%
Baosteel relies on imported iron ore from
Net Profit (RMBm) Old New % Chg
2010e 11,991 9,079 -24.3%
Australia and Brazil.
2011e 13,140 12,491 -4.9%
2012e 13,699 12,896 -5.9%
Baosteel: Key data

YE Dec Sales NPAT EPS PE PB Div yield ND/E EV/EBITDA
(RMBm) (RMBm) (RMB) (x) (x) (%) (%) (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 4.6
FY11e 212,466 12,491 0.71 8.6 1.0 5.2 21 3.8
FY12e 227,648 12,896 0.74 8.3 0.9 5.4 7 3.2
21
18 June 2010
Angang (OW(V), TP HKD12 / Valuation and risks

RMB9.5) We reiterate our Overweight (V) rating on
Consolidation is the right direction Angang and reduce our target price to HKD12
(HKD15), valuing the stock at 1.3x PB (1.6x) and
While the government approved merger between
2010e book value of HKD8.85/share. We arrive at
Angang’s parent company Anshan Iron & Steel and
a PB of 1.3x from our residual income model (PB
Panggang Group in late May 2010 should have
= ROE-g/COE-g) using a sustainable ROE of
minimal near-term impact on the listed company, we
15% (20%), in line with its 2002-09 historical
believe there is a distinct possibility for parent asset
average. We decrease our A-share target price to
injections in the medium term. We see this as a key
RMB9.5 (RMB11.5) based on the average A- to
catalyst for the stock going forward.
H-share discount of 22%.
Like its domestic peers, Angang has followed
We consider Angang A- and H-shares to be
Baosteel’s lead in cutting domestic product prices
volatile. Under our research model, for stocks
for July by 9%, reflecting the current soft
with a volatility indicator, the Neutral band is 10
domestic pricing environment. That said, we
percentage points above and below our hurdle rate
believe the company will continue to hold a
for Chinese stocks of 10% (or 0-20%). Our
domestic competitive advantage through its iron
HKD12 target for the H-shares suggests a
ore pricing arrangement with its parent and
potential return, including 3.5% dividend yield, of
volume growth through the full commissioning of
24.5%, which is above the Neutral band. Our
its 5mt Bayuquan project.
RMB9.5 target for the A-shares suggests a
Earnings changes potential return, including 3.9% dividend yield, of
Angang earnings revisions 26.3%, which is above the Neutral band.
Revenues (RMBm) Old New % Chg
The key downside risk for Angang, in our view,
2010e 92,816 90,476 -2.5%
2011e 97,534 98,119 0.6%
lies in the movement of steel prices. On the raw
2012e 90,274 88,148 -2.4% material side, movements in the coal price
represent risks. Delays in Angang group’s M&A
2010e 9,165 6,675 -27.2%
2011e 13,078 12,345 -5.6% activity also pose a risk to current market
2012e 14,191 12,109 -14.7% expectations.
2010e 6,175 4,304 -30.3%
2011e 9,119 8,561 -6.1%
2012e 10,025 8,461 -15.6%
Angang: Key data

YE Dec Sales NPAT EPS PE PB Div Yield ND/E EV/EBITDA
(RMBm) (RMBm) (RMB) (x) (x) (%) (%) (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 6.8
FY11e 98,119 8,561 1.18 7.3 1.0 6.8 46 4.5
FY12e 88,148 8,461 1.17 7.4 0.9 6.7 36 4.3
Note: Ratios based on closing price on 16 June 2010
22
18 June 2010
Maanshan (OW(V), TP Valuation and risks

HKD4.5 / RMB4.5) We maintain an OW(V) rating on Maanshan H
Balanced product mix an advantage shares but reduce its target price to HKD4.5
(HKD6), based on 1.1x PB (1.3x PB) and 2010e
Maanshan’s balanced product mix allows the
book value of HKD4.24/share. We arrive at a PB
company a high degree of flexibility to adapt to
of 1.1x from our residual income model (PB =
changing operating conditions. Management has
ROE-g/ COE-g) using a sustainable ROE estimate
guided for a 20% uplift in train wheel
of 13% (16%) in line with our forecast average
(Maanshan’s highest margin product) sales
ROE over 2010-12. We reduce our target for the
volumes from 150kt in 2009 to 180kt in 2010e. In
A-shares toRMB4.5 (RMB5.5) as the A shares are
the long term, Maanshan’s subsidiary, Hefei Iron
trading at a par with the H shares.
& Steel, has commenced construction of a new
flat steel plant consisting of a 3mtpa hot strip mill We consider Maanshan’s H- and A-shares
and a 1.5mtpa cold strip mill which should further volatile. Under our research model, for China
enable the company to improve its product mix. stocks with a volatility indicator, the Neutral band
is 10 percentage points around our hurdle rate of
We reiterate our OW(V) rating on Maanshan
10% (or 0-20%). Our HKD4.5 target price for the
given its attractive valuation. Trading at 0.8x PB
H-shares implies a potential return of 31%
compared to its recent high of 1.6x and the sector
(including dividend yield of 3.6%) from the
average of 1.2x, Maanshan stands out as one of
closing price of HKD3.53 on 16 June, which is
the cheapest steel plays in the region and remains
above the Neutral band. Our target price of
our preferred steel exposure in China.
RMB4.5 for the A-shares implies a potential
Earnings changes return of 33.2% (including dividend yield of
Maanshan earnings revisions 3.2%) from the closing price of RMB3.46, which
Revenues (RMBm) Old New % Chg is above the Neutral band.
2010e 68,193 66,844 -2.0%
2011e 70,319 71,371 1.5%
Movement in steel prices represents a key downside
2012e 64,954 64,959 0.0% risk for the company. Any potential credit tightening
by the government, having an impact on stimulus
2010e 5,738 4,270 -25.6%
2011e 6,158 6,088 -1.1% spending, represents a key downside risk, as
2012e 8,591 8,600 0.1%
Maanshan, with its exposure to long steel, has been a
key beneficiary of the stimulus.
2010e 3,421 2,445 -28.5%
2011e 3,972 3,916 -1.4%
2012e 5,882 5,887 0.1%
Maanshan: Key data

(RMBm) (RMBm) (RMB) (x) (x) (%) (%) (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 3.9
FY11e 71,371 3,916 0.51 6.1 0.8 5.8 21 2.9
FY12e 64,959 5,887 0.76 4.0 0.7 8.7 10 2.2
23
18 June 2010
China Steel (OW(V), TP Valuation and risks

TWD37) We reiterate our OW(V) on CSC but decrease our
Monthly stats indicate strong 1H10 target price to TWD37 (TW42), valuing the stock
at 1.8x PB (2.0x PB) and 2010e book value of
Unlike other companies in our coverage universe,
TWD20.8. We arrive at a PB of 1.8x from our
China Steel (CSC) reports operating data and pre-
residual income model (PB = ROEg / COE-g)
tax profit on a monthly basis. From its recently
using a sustainable ROE of 17%, in line with our
released May data, we see ytd pre-tax profit at
TWD22.74bn. This run-rate is tracking marginally average forecast ROE of 17% over 2010-12.
ahead of our FY10 forecast of TWD47.2bn and We consider CSC stock volatile. Under our
market consensus of TWD44.8bn. We continue to research model, for Taiwan stocks with a
see positive price momentum for the company, volatility indicator, the Neutral band is 10
with price hikes of 6.6% for CSC’s July-August percentage points around the hurdle rate of 9.5%
deliveries on anticipated higher raw material costs
(or -0.5-19.5%). Our NTD37 target price suggests
in SepQ10. We note that CSC product prices have
potential upside of 20.5% over the closing price
increased by almost one-third since the start of the
on 16 June of NTD30.70. Adding in the expected
year. We believe CSC is well leveraged to a steel
8.1% dividend yield suggests a potential return of
cycle upswing with a robust near-term order book
28.7%, which is above the Neutral band.
and strong volume growth. With a 2010e dividend
yield of 8.1% compared to the sector average of The key risk to our valuation lies in the movement
2.7%, the company is the highest dividend payer of steel prices. The key downside risks are a
in the region. slowdown in the euro zone, which would
Earnings changes negatively impact steel consumption. On the raw
material side, movements in coal and iron ore
CSC earnings revisions
prices are risks. Successful execution of key
Revenues (TWDm) Old New % Chg
growth projects poses a further risk.
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 % Chg
2010e 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 % Chg
2010e 42,266 37,666 -10.9%
2011e 46,868 49,111 4.8%
2012e 66,838 55,289 -17.3%
China Steel - Key data

(TWDm) (TWDm) (TWD) (x) (x) (%) (%) (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 8.7
FY11e 279,897 49,111 3.80 8.1 1.4 10.6 8 6.9
FY12e 303,899 55,289 4.28 7.2 1.3 11.9 2 5.9
24
18 June 2010
SAIL (OW(V), TP INR256) Valuation and risks

Top pick in the Indian steel space We lower our target price to INR256 (INR272) as a
result of a 5% cut in our steel price forecasts. We
SAIL is best placed vis-à-vis its peers on account of
also marginally cut our volume estimates for SAIL
its 100% iron ore integration in a rising cost
by 4%/ 3% in FY11/12 as we expect the volume
environment, in our view. We see the recent
expansion to be back-ended.
correction in share price as an entry opportunity.
However, we expect price volatility in the near term We value SAIL on a blend of PB and
over concerns of timing of the FPO and its issue EV/EBITDA. Our PB multiple of 2.1x (same) is
price. In Asia Steel: Fear vs fundamentals dated 6 derived from the residual income model,
May, we mentioned that equity dilution at current assuming a long-term sustainable ROE of 25%
prices is not a concern and could actually be neutral (same). On EV/EBITDA methodology, we apply
to marginally positive for the stock. a multiple of 6.5x (same) which is at a c10%
discount to the corresponding multiple for Tata
In the longer term SAIL has aggressive capacity
Steel’s India operations, given SAIL’s lack of
expansion plans to grow to 20.6mtpa by FY14
captive coking coal. Our PB and EV/EBITDA
(March) from the current 12.6mtpa which will
derived fair values are INR243 and INR269
provide it with strong operating leverage. That said,
respectively. Accordingly, we derive a blended
we believe that the first phase of the expansion will
target price of INR255, which at 16 June closing
come on stream only in FY12 with IISCO’s 2mtpa
price of INR198 offers 30.8% potential return
expansion. We expect an incremental 2mtpa
including dividend yield of 1.5%. The potential
capacity expansion in FY12-15.
return is above the Neutral band of 0.5-20.5% for
Earnings changes a volatile Indian stock with hurdle rate of 10.5%.
SAIL earnings revisions (INRm)
Key risk lies in the movement of steel and coking
New Old Change
coal prices as SAIL does not have captive coking
Sales
FY11e 444,916 465,670 -4% coal assets. Further, given the robust expansion plans
FY12e 558,803 573,468 -3% project execution also poses some risks.
EBITDA
FY11e 124,593 145,121 -14%
FY12e 165,134 180,655 -9%
NPAT
FY11e 72,478 81,248 -11%
FY12e 97,204 102,469 -5%
SAIL: Key data

YE March Sales NPAT EPS PE P/B Div yield ND/E EV/EBITDA
(INRm) (INRm) (INR) (x) (x) (%) (%) (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 6.7
FY11e 444,916 72,478 17.55 11.3 2.1 1.5 -20 5.9
FY12e 558,803 97,204 23.54 8.4 1.7 1.6 -7 4.7
25
18 June 2010
Tata Steel (N(V), TP INR562) Tata Steel earnings revisions (INRm)

New Old Change
European operations still haunt
Sales
We remain Neutral (V) on Tata Steel given the FY11e 1,104,226 1,057,523 4%
FY12e 1,144,443 1,191,676 -4%
margin pressure in European operations due to EBITDA
higher raw material costs as well as continuing FY11e 152,671 155,476 -2%
FY12e 167,163 188,910 -12%
pressure on prices. Our European Steel Team NPAT
FY11e 47,538 49,268 -4%
recently increased FY11 HRC prices by 3% and FY12e 59,235 66,523 -11%
reduced FY12 prices by 3% (see European Steel: Source: HSBC estimates
Dead money or a value opportunity? Why
patience will be rewarded, 7 June). While we Valuation and risks
expect a full input cost pass-through in the case of Our new target price for Tata Steel is INR562
flat products, we believe the long segments (Tata (INR690). We value Tata Steel based on a 50-50
Steel Europe has 25% exposure) to come under blend of PB and EV/EBITDA. We have revised
pressure. Further, any potential production cut our long-term sustainable ROE assumption to
should inhibit upside from volume leverage on 15% (17%) primarily given the uncertainty of
account of high fixed cost of European operations. volume expansion in Europe and accordingly our
Over the medium term, Indian operations, though residual income derived PB multiple stands at
highly profitable, are unlikely to see the benefits 1.2x (1.4x). On EV/EBITDA methodology, we
of ongoing expansion to 10mtpa (from 6.8mtpa) value Tata Steel on a SOTP basis with multiples
until FY13. Given the high profitability of the of 7x, 4.5x and 2x for the Indian, European and
India operations (nearly 4x European other Asian operations, respectively. Our PB
EBITDA/ton), delays in implementation of the derived fair value of INR548 and EV/EBITDA
project could be incrementally negative. derived fair value of INR576 blend into a target
price of INR562. Our target price implies a
Earnings changes potential return of 17% (including 1.4% dividend
We lower our earnings by 4/11% for FY11/12 on yield) over the closing price of INR486 on 16
account of lower steel prices for the more profitable June, which is within the HSBC Neutral band of
India business as well as higher iron ore costs for 0.5-20.5% for a volatile Indian stock which has a
Corus which is not integrated. We also lower our hurdle rate of 10.5%.
FY12 volume assumptions for both Europe (2%)
Key risks include steel prices for an almost input
and India (3%) given delays in India expansion and
cost neutral Tata Steel India, while demand,
the uncertain volume outlook in Europe.
utilization, pricing and input cost issues form key
risks for the European operations.
Tata Steel: Key data

(INRm) (INRm) (INR) (x) (x) (%) (%) (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 9.4
FY11e 1,104,226 47,538 53.61 9.1 1.2 1.4 138 5.6
FY12e 1,144,443 59,235 66.80 7.3 1.1 2.7 125 5.0
26
18 June 2010
JSW Steel improvements in raw material linkages given

(OW(V), TP INR1,280) execution slippages in the past.
Flying high Earnings changes

We keep JSW at OW(V) given its volume leverage, JSW Steel earnings revisions (INRm)
product mix and better cost structure over the New Old Change
medium term from captive iron ore and coking coal. Sales
FY11e 258,250 260,422 -1%
Given the above-average earnings growth, strong FY12e 323,617 326,944 -1%
operating leverage and expansion in margins, we EBITDA
FY11e 52,277 55,992 -7%
believe current valuations are not demanding. FY12e 71,721 80,328 -11%
NPAT
Moreover, JSW has signed an MOU with JFE
FY11e 17,758 19,405 -8%
through which JFE could potentially take a minority FY12e 27,346 31,783 -14%
stake in JSW as well as partner JSW for its 10mtpa Source: HSBC estimates
greenfield project in West Bengal. We believe that if

the JFE tie-up goes through, then it could lead to a Valuation and risks
further re-rating of the stock. We lower our TP to INR1,280 (INR1,460) due to
earnings estimates cuts. We value JSW on a 50-50
JSW has recently commissioned first phase of its
blend of PB and EV/EBITDA. Our PB multiple of
Hot Strip mill which will enable it to produce higher
1.9x (same) is derived from the residual income
margin products. Further, we expect the additional
model assuming a long-term sustainable ROE of
3.2mtpa of crude capacity at Vijaynagar to come on
24% (same), while our EV/EBITDA multiple of
stream by March 2011. Over the medium term,
6.0x (same) is at a 10% discount to SAIL due to its
JSW’s focus on raw material integration is positive
lower backward integration. Our PB derived fair
as it should help to improve its cost structure.
value of INR1,240 and EV/EBITDA derived fair
JSW expects to produce c8mt of incremental iron value of INR1,318 blend into our target price of
ore from captive sources in Karnataka and Chile INR1,280. The potential return of 22.4% includes
within the next 18-24 months. Commissioning of the dividend yield of 1.3% over the closing price of
beneficiation plant at Vijaynagar will also allow use INR1057 on 16 June and is above HSBC’s Neutral
of cheaper low grade ores. On the coking coal front, band of 0.5-20.5% with hurdle rate of 10.5%.
the company recently acquired coking coal mines in
Any upward movement in steel prices and
the US. These mines have resources totalling 123mt
downward movement in iron ore and coking coal
and JSW expects 1mtpa of production starting
prices are positive for the stock. Tie-up with JFE
September 2010, which could ramp up to c3mt over
Steel is a key near term trigger.
the next two years with FOB cost of cUSD100/t
(currently USD205/t).We have not factored these
JSW Steel: Key data

(INRm) (INRm) (INR) (x) (x) (%) (%) (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 7.5
FY12e 323,617 27,346 146.23 7.2 1.5 2.1 150 5.4
FY13e 328,049 29,397 157.20 6.7 1.3 2.2 133 4.9
27
18 June 2010
Bluescope (OW(V), TP AUD3) Valuation and risks

Currency moves a positive We maintain our rating at Overweight (V) but cut
our target price to AUD3 (AUD3.5) based on PB
We keep our OW(V) rating on Bluescope (BSL),
of 0.9x (1.1x) and its FY11e book value of
noting that valuation remains attractive. In our view,
AUD3.27/share. We arrive at a PB of 0.9x from
BSL’s vertically integrated business model provides
our residual income model (PB = ROE-g/COE-g)
leverage to improved operating conditions.
using a sustainable ROE of 10% (11%).
BSL is a direct beneficiary of recent currency
We consider BlueScope stock volatile. Under our
moves, with USD appreciation strengthening the
dollar contribution of its US-based divisions research model, for Australia stocks with a
volatility indicator, the Neutral band is 10
(Coated and Hot Rolled productions), which
account for c25% of 2010e revenues. In addition, percentage points around the hurdle rate of 9.5%.
Our AUD3 target price suggests potential return
a weakening AUD increases the company’s
pricing competitiveness. We believe the key near- of 27.7% over the closing price on 16 June of
AUD2.35. Adding in the expected 1.7% dividend
term catalyst will be the FY10 results due in mid
August. Management has guided for a ‘small yield suggests a potential return of 29.4%, which
is above the Neutral (V) band.
profit’, encouraged by continued improvement in
domestic/export demand, resilient steel prices and Movement in steel prices remains the key risk for
internal cost reduction initiatives. the company. Our FX Research Team
substantially lowered its AUD/USD to 0.85 for
Earnings changes
2010-11 (from 0.95 and 1.00 respectively) in its
BlueScope earnings revisions
10 June 2010 Currency Outlook report. This was a
Revenues (AUDm) Old New % Chg
key driver in increasing our BSL earnings
2010e 9,655 9,954 3.1%
2011e 12,042 13,617 13.1% estimates. Any currency appreciation over
2012e 12,499 13,426 7.4% forecast poses a downside risk.
EBIT (AUDm) Old New % Chg
2010e 231 233 1.1%
2011e 664 771 16.1%
2012e 869 881 1.3%
Net Profit (AUDm) Old New % Chg
2010e 93 93 -0.5%
2011e 401 465 15.9%
2012e 545 548 0.6%
BlueScope Steel - Key data

YE Jun Sales NPAT EPS PE PB Div Yield ND/E EV/EBITDA
(AUDm) (AUDm) (AUD) (x) (x) (%) (%) (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 8.7
FY11e 13,617 465 0.25 9.2 0.7 5.5 13 4.4
FY12e 13,426 548 0.30 7.8 0.7 6.4 11 4.0
28
18 June 2010
Notes
29
18 June 2010
Notes
30
18 June 2010
Notes
31
18 June 2010
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 disclosures
Stock 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 this
website.
HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's
existing holdings and other considerations. Different securities firms use a variety of ratings terms as well as different rating
systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each research
report. In addition, because research reports contain more complete information concerning the analysts' views, investors
should carefully read the entire research report and should not infer its contents from the rating. In any case, ratings should not
be used or relied on in isolation as investment advice.
Rating definitions for long-term investment opportunities

Stock ratings
HSBC assigns ratings to its stocks in this sector on the following basis:
For each stock we set a required rate of return calculated from the risk free rate for that stock's domestic, or as appropriate,
regional market and the relevant equity risk premium established by our strategy team. The price target for a stock represents
the value the analyst expects the stock to reach over our performance horizon. The performance horizon is 12 months. For a
stock to be classified as Overweight, the implied return must exceed the required return by at least 5 percentage points over the
next 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the
stock must be expected to underperform its required return by at least 5 percentage points over the next 12 months (or 10
percentage points for a stock classified as Volatile*). Stocks between these bands are classified as Neutral.
Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation of coverage, change of volatility
status or change in price target). Notwithstanding this, and although ratings are subject to ongoing management review,
expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily
triggering a rating change.
*A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12
months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However,
32
18 June 2010
stocks which we do not consider volatile may in fact also behave in such a way. Historical volatility is defined as the past
month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating,
however, volatility has to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.
Rating distribution for long-term investment opportunities

As of 17 June 2010, the distribution of all ratings published is as follows:
Overweight (Buy) 52% (18% of these provided with Investment Banking Services)
Neutral (Hold) 35% (17% of these provided with Investment Banking Services)
Underweight (Sell) 13% (14% of these provided with Investment Banking Services)
Information regarding company share price performance and history of HSBC ratings and price targets in respect of its long-
term investment opportunities for the companies the subject of this report,is available from www.hsbcnet.com/research.
HSBC & Analyst disclosures

Disclosure checklist
Company Ticker Recent price Price Date Disclosure
ANGANG STEEL 0347.HK 9.91 16-Jun-2010 4, 11
BLUESCOPE STEEL BSL.AX 2.35 16-Jun-2010 2, 6, 7
CHINA STEEL CORP 2002.TW 30.70 16-Jun-2010 2, 6, 7
JFE HOLDINGS 5411.T 2986.00 16-Jun-2010 2, 7
JSW STEEL LTD JSTL.BO 1057.25 16-Jun-2010 2, 4
MAANSHAN IRON & STEEL 0323.HK 3.51 16-Jun-2010 2, 4, 7, 11
NIPPON STEEL 5401.T 318.00 16-Jun-2010 2, 6, 7
POSCO 005490.KS 472000.00 16-Jun-2010 2, 7, 11
TATA STEEL TISC.NS 485.55 16-Jun-2010 2, 4, 6, 7
Source: HSBC
1 HSBC* has managed or co-managed a public offering of securities for this company within the past 12 months.
2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next
3 months.
3 At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this
company.
4 As of 31 May 2010 HSBC beneficially owned 1% or more of a class of common equity securities of this company.
5 As of 30 April 2010, this company was a client of HSBC or had during the preceding 12 month period been a client of
and/or paid compensation to HSBC in respect of investment banking services.
and/or paid compensation to HSBC in respect of non-investment banking-securities related services.
and/or paid compensation to HSBC in respect of non-securities services.
8 A covering analyst/s has received compensation from this company in the past 12 months.
9 A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as
detailed below.
10 A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this
company, as detailed below.
11 At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or in
securities in respect of this company
Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment
banking revenues.
For disclosures in respect of any company mentioned in this report, please see the most recently published report on that
company available at www.hsbcnet.com/research.
* HSBC Legal Entities are listed in the Disclaimer below.
33
18 June 2010
Additional disclosures
1 This report is dated as at 18 June 2010.
2 All market data included in this report are dated as at close 16 June 2010, unless otherwise indicated in the report.
3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its
Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research
operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier
procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or
price sensitive information is handled in an appropriate manner.
4 As of 31 May 2010, HSBC beneficially owned 2% or more of a class of common equity securities of the following
company(ies) : TATA STEEL
5 As of 31 May 2010, HSBC and/or its affiliates (including the funds, portfolios and investment clubs in securities managed
by such entities) either, directly or indirectly, own or are involved in the acquisition, sale or intermediation of, 1% or more
of the total capital of the subject companies securities in the market for the following Company(ies) : TATA STEEL ,
MAANSHAN IRON & STEEL , JSW STEEL LTD , ANGANG STEEL
34
18 June 2010
Disclaimer
* Legal entities as at 31 January 2010 Issuer of report
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Limited, Hong Kong; 'TW' HSBC Securities (Taiwan) Corporation Limited; 'CA' HSBC Securities (Canada) Corporation Limited
Inc, Toronto; HSBC Bank, Paris branch; HSBC France; 'DE' HSBC Trinkaus & Burkhardt AG, Dusseldorf;
000 HSBC Bank (RR), Moscow; 'IN' HSBC Securities and Capital Markets (India) Private Limited, Mumbai; Level 19, 1 Queen’s Road Central
'JP' HSBC Securities (Japan) Limited, Tokyo; 'EG' HSBC Securities Egypt S.A.E., Cairo; 'CN' HSBC Hong Kong SAR
Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking Telephone: +852 2843 9111
Corporation Limited, Singapore branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Telex: 75100 CAPEL HX
Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC
Fax: +852 2596 0200
Securities (South Africa) (Pty) Ltd, Johannesburg; 'GR' HSBC Pantelakis Securities S.A., Athens; HSBC
Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv, 'US' HSBC Securities (USA) Inc, New York; HSBC Website: www.research.hsbc.com
Yatirim Menkul Degerler A.S., Istanbul; HSBC México, S.A., Institución de Banca Múltiple, Grupo
Financiero HSBC, HSBC Bank Brasil S.A. - Banco Múltiplo, HSBC Bank Australia Limited, HSBC Bank
Argentina S.A., HSBC Saudi Arabia Limited.
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[270552]
35
abc
Global Natural Resources & Energy
Research Team
Metals and Mining Alternative Energy
EMEA Robert Clover
Andrew Keen Global Sector Head, Alternative Energy
+44 20 7991 6764 andrew.keen@hsbcib.com +44 20 7991 6741 robert.clover@hsbcib.com
Thorsten Zimmermann, CFA James Magness

+44 20 7991 6835 thorsten.zimmermann@hsbcib.com +44 20 7991 3464 james.magness@hsbcib.com
Veronika Lyssogorskaya Charanjit Singh

+44 20 7992 3686 veronika.lyssogorskaya@hsbcib.com +91 80 3001 3776 charanjit2singh@hsbc.co.in
North America & Latin America Chemicals

Jordi Dominguez
Steven Hong Xing Li
+1 212 525 3460 jordi.x.dominguez@us.hsbc.com
+852 2996 6941 stevenhongxingli@hsbc.com.hk
Lucia Marquez
Sriharsha Pappu
+1 212 525 7669 lucia.x.marquez@us.hsbc.com
+971 4 4236924 sriharsha.pappu@hsbc.com
James Steel
+1 212 525 6515 james.steel@us.hsbc.com Utilities
Sabrina M Grandchamps Europe
+1 212 525 5150 sabrina.m.grandchamps@us.hsbc.com Adam Dickens
+44 20 7991 6798 adam.dickens@hsbcib.com
CEEMEA
Veronika Lyssogorskaya José A López
+44 20 7992 3686 veronika.lyssogorskaya@hsbcib.com +44 20 7991 6710 jose1.lopez@hsbcib.com
Asia Verity Mitchell

Daniel Kang +44 20 7991 6840 verity.mitchell@hsbcib.com
+852 2996 6669 danielkang@hsbc.com.hk Asia
Jatin Kotian Gary Chiu
+91 22 2268 1638 jatinkotian@hsbc.co.in +852 2822 4297 garychiu@hsbc.com.hk
Sarah Mak Scully Tsoi

+852 2822 4551 sarahmak@hsbc.com.hk +852 2996 6620 scullytsoi@hsbc.com.hk
Lun Zhang Chris Chan

+852 2996 6569 lunzhang@hsbc.com.hk +852 2996 6619 chris.chan@hsbc.com.hk
Suman Guliani
Energy
+91 80 3001 3747 sumanguliani@hsbc.co.in
Europe
Latin America
Paul Spedding
Reginaldo Pereira
Global Sector Head, Oil and Gas
+55 11 3371 8203 reginaldo.l.pereira@hsbc.com.br
+44 20 7991 6787 paul.spedding@hsbcib.com
David Phillips Credit
+44 20 7991 2344 david1.phillips@hsbcib.com Europe
Omprakash Vaswani Rodolphe Ranouil, CFA
+91 80 3001 3786 omprakashvaswani@hsbc.co.in +44 20 7991 6855 rodolphe.ranouil@hsbcgroup.com
CEEMEA, Brazil
Anisa Redman
+44 20 7991 6822 anisa.redman@hsbcib.com
Asia Specialist Sales
Sonia Song, CFA Jacques Vaillancourt
+852 2996 6557 soniasong@hsbc.com.hk +44 20 7991 5210 jacques.vaillancourt@hsbcib.com
Duke Suttikulpanich Mark van Lonkhuyzen
+852 2996 6590 dukesuttikulpanich@hsbc.com.hk +44 20 7991 1329 mark.van.lonkhuyzen@hsbcib.com
Kumar Manish Billal Ismail
+91 22 2268 1238 kmanish@hsbc.co.in +44 20 7991 5362 billal.ismail@hsbcib.com
Kirtan Mehta, CFA
+91 80 3001 3779 kirtanmehta@hsbc.co.in
Puneet Gulati
+91 22 681235 puneetgulati@hsbc.co.in
Real Estate
CEEMEA
Levent Bayar
Analyst
+90 212 376 46 17 leventbayar@hsbc.com.tr

Asia Steel - 3Q 2010

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Global Natural Resources

Asia Metals & Mining

Asia Steel  Sentiment to improve as output cuts

Valuation and key changes

HSBC vs Consensus net profit estimates

HSBC Asia Steel – Earnings and commodity price revisions

Source: HSBC, Datastream

Near-term headwinds remain in place and 3Q

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

Source: World Steel Dynamics _ Average 2006-2009___ _______ 2010_________

September which will reduce 3Q crude steel

bouncing back again in 4Q. For 2010 we have

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

May run rate for the end user activities we estimate

Oversold — Valuations below Asia Steel EV/t of capacity

trend and replacement costs 1,600

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

2010 quarterly forecasts  POSCO’s strong balance sheet, diverse

HSBC Asia Steel sector score card

Asia Steel performance table

HSBC Asia Steel valuation table

_____________________ PE (x) ______________________ __________________ FCF yield (%)___________________

EV/t capacity _________________ EV/EBITDA (x) __________________ ____________________ ROE (%)_____________________

HSBC Asia Steel valuation table

Demand seasonality – 3Q pain before 4Q gain 5

Steel prices to stabilise 5

Oversold — Valuations below trend and replacement costs 6

3Q margin squeeze – prices

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

Therefore, JunQ10 pricing uses an index average

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

POSCO (OW(V), TP Valuation and risks

POSCO: key data

Nippon Steel (N(V), TP Valuation and risks

NSC: key data

JFE (N(V), TP JPY3,350) Valuation and risks

JFE: Key data

Baosteel (OW(V), TP RMB8) Valuation and risks

Baosteel: Key data

Angang (OW(V), TP HKD12 / Valuation and risks

Angang: Key data

Maanshan (OW(V), TP Valuation and risks

Maanshan: Key data

China Steel (OW(V), TP Valuation and risks

China Steel - Key data

SAIL (OW(V), TP INR256) Valuation and risks

SAIL: Key data

Tata Steel (N(V), TP INR562) Tata Steel earnings revisions (INRm)

Tata Steel: Key data

JSW Steel improvements in raw material linkages given

Flying high Earnings changes

greenfield project in West Bengal. We believe that if

JSW Steel: Key data

Source: World Steel Dynamics _ Average 2006-2009_ _ 2010_____

_ PE (x) FCF yield (%)___

EV/t capacity _ EV/EBITDA (x) ROE (%)_______