AmWatch - Steel Sector : A new Chinese partner to revive Perwaja OVERWEIGHT, 11 May 2015

SECTOR FOCUS OF THE DAY

Steel Sector : A new Chinese partner to revive Perwaja?               OVERWEIGHT

Perwaja Holdings could be given a new lease of life following a collaboration deal it signed with China's Tianjin Zhi Yuan Group Co Ltd last Friday. Under the agreement, Zhi Yuan is supposed to pump in RM300mil to equip and upgrade Perwaja's Kemaman steel plant in Terengganu for the production of stainless steel products.

The investments will subsequently be divided into two phases. Phase 1 will entail Zhi Yuan investing a sum of RM100mil. Out of this, RM30mil will be in the form of a security deposit for the leasing of the Kemaman plant from Perwaja. The balance will be allocated for new machinery that Zhi Yuan will bring into the plant. As for the second phase, the Chinese party will inject another RM200mil to further upgrade and equip the plant. This is to spur the production of some 400,000 tonnes of semi-finished stainless steel slabs annually. Further investments by Zhi Yuan will only be unveiled 18 months later under the third phase of Perwaja's five-year revival plan. By then, the target is to produce ~ 800k tonnes of alloy steel per year.

We believe Zhiyuan's plan is to transform Perwaja into stainless steel producer by utilising its brownfield plant in Kemaman as a base to produce higher-value alloy steel. A formal agreement could reportedly be consummated within three months, with production at the Kemaman plant to be activated within six months. The proposed investment by Zhi Yuan comes on the heels of a proposed RM4bil investment by Alliance Sdn Bhd (a unit of China's Guangxi Beibu) to build an integrated steel mill in Kuantan for the production of high-carbon and H-shaped steel.

By and large, local steel prices remain muted on the continued influx of Chinese steel amid stiff competition in the international steel markets. On a more positive note, sentiment on domestic steel players could be lifted by the unveiling of the 11th Malaysia Plan scheduled later this month. We retain our OVERWEIGHT call on the steel sector. Within it, Ann Joo Resources (BUY) remains as our top pick as current valuations are at trough P/B levels. Lion Industries remains a HOLD.        

Others :

Banking Sector : Key takeaways from discussion session on impaired loans guideline       NEUTRAL

QUICK TAKES

Parkson Holdings : Continued brand expansion  BUY

Eastern & Oriental : May 11: Deadline for submission of tender documents          BUY

Plantation Sector : Newsflow for week 5 to 8 May            NEUTRAL

NEWS HIGHLIGHTS

WCT Holdings : Two-pronged strategy to up shareholder value

Oil and Gas : Petronas to scale down exploration

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