HIAPTEK - Contract Award to China Shougang (OSK)

Hiap Teck Venture (HTVB) announced yesterday that its 55% owned Eastern Steel SB had entered into an engineering and procurement contract (EPC) and a construction contract with China Shougang International Trade and Engineering Corporation (China Shougang) for RM417.8m and RM232m respectively. This 1st phase of its integrated steel mill (blast furnace) in Teluk Kalung, Kemaman, Terengganu will have an annual production capacity of up to 700,000 tonnes per year (tpy). The expected completion is slated for 2013. In addition, Eastern Steel also entered into a supplemental agreement with China Shougang that agreed to place out 32.2m HTVB share to China Shougang or its nominated affiliates at an issue price to be agreed upon.

Downgrade to SELL after the recent run-up. While we are mildly positive on HTVB’s subsidiary award of the EPCC contract for its BF project to China Shougang, we remain cautious of HTVB’s upstream venture. The impending proposed cash call via the right issue to fund this capex intensive project, long gestation period plus management’s lack of experience in upstream cum BF operation are a few of our concerns. Although we retain our EPS estimates and keep our FV of RM0.95 derived from 8x FY12EPS for now, pending the proposed cash call exercise, the recent share price run-up of 20% ahead of our FV following the premature iron ore concession rumours prompts us to downgrade HTVB to SELL from NEUTRAL.