FerroChina

Waiting for completion of acquisition

Delay in completion of acquisition.

acquisition within two to three months from the time of announcement. The

delay is due to the longer time needed to obtain the whitewash waiver from the

Security Industry Council (SIC). With the number of reverse takeover

transactions announced ytd, the number of cases pending SIC?s approval is

likely to be high. Hence, it is reasonable that the transaction is taking longer to

complete. We do not expect the deal to fall through as the minority shareholders

are not prejudiced by the transaction. Judging from the share price after the

announcement of the deal, the market has reacted positively.We expected FerroChina to complete the

Date of consolidation is pushed back.

is a transition year and the reported profit would depend on the exact date of the

completion of the acquisition. Therefore, we maintain our forecast for 2007

since there is no change to our estimates for 2008 and 2009. For the purpose

of monitoring, we would track the financial performance of FerroChina and Super

Team separately, rather than the reported figures.We highlighted previously that 2007

Facing headwinds.

of this year. Hence, the Chinese government has imposed a number of

measures, such as reduction or withdrawal of VAT rebates and implementation

of export quotas, to slow the growth of steel exports. While FerroChina?s VAT

rebate is reduced from 8% to 5%, this should be a manageable price risk as the

company has been raising prices to compensate for the rebate reduction.

Global steel demand has remained firm and the slowdown in supply from China

would probably help keep prices stable. We are more concerned about the

quota system. Even though FerroChina?s high-end galvanised steel and cold

rolls are not affected by the current quota requirements, imposition of quotas on

these products could hurt FerroChina?s growth as FerroChina exports make up

more than 30% of its output.China?s steel export grew 117% yoy in the first five months

Aiming to grow via acquisition and capacity expansion.

as a beneficiary of the consolidation in the China steel sector. FerroChina plans

to acquire under-utilised galvanised steel companies and apply its strong

technical capabilities to turn around these companies.We see FerroChina

Accumulate on weakness.

investors? sentiments are turning cautious on the China steel sector and

FerroChina?s share price has pulled back from its recent high. We like the

company for its market leadership in galvanised steel, good management, clear

growth strategies and strong execution capabilities and advise investors to

accumulate the stock on price weakness. When sentiments on the China steel

sector turn positive, we believe FerroChina would be in play again. Catalysts for

the stock price would be the completion of the Super Team acquisition,

newsflows on the commencement of new production line or merger & acquisition

activities. Based on our valuation of 9x FY08 PE, our 12-month target price is

S$2.90. Reiterate BUYAs the risk of oversupply in China has heightened,