Summary

Chongqing Iron & Steel Company Limited (CISL or Company) achieved net profit of RMB 449 million in 2007, rose by 48.18% year-on-year. Fully diluted EPS was RMB 0.27. 2008 Q1 realized net profit was RMB 186 million, gained 51.22% than 2007 Q1, with EPS 0.11 RMB.

Anticipated steel output for the Company in 2008 will be around 3.1 million tons, with comparative small overall scale.

Currently around 60% of the Companys major products are distributing around Southwest China, and CISL enjoys stable market and extensive clients in this region. Chinas central government is introducing West China development and promotion policy, along with increase emphasis on infrastructure construction and investment expansion on related industries for West China, regional demand on steel products will have a greater increase.

As a large steel maker in Southwest China, as well as one of the domestic largest HR steel plate producers, price gain for specialized HR steel plate price will benefit the Company.

We estimate that the Companys achieved EPS in 2008 and 2009 will be RMB 0.36 and RMB 0.37, and give 10 times P/EX 2008, therefore corresponding 6-month target price will be HK$ 4.080. We give CISL “Buy” rating.

Product mix: apparent HR steel plate advantages

Currently the Company owns 3 million comprehensive steel production capability, of which, specialized HR steel plate is the CISLs flagship product, occupies more than 30% market share in Southwest China.

Continuous HR steel plate price increasely provides strong support for the Companys performance. HR steel plates high profitability comes from large proportion for the specialized plate, which accounts for 90% or above for HR steel plate output. While the corresponding market share for HR steel plate is comparative high, with 13-18% for ship and vessel sector, 9-16% for boiler, 11-15% for container plate, 60-65% for ball flat steel, and 50-70% for coal machinery.

As respect of the Company product chain, of which consists of plate, billet, profile, wire, cold-rolled plates, and other end products, among that, proportion for plate accounts up to 42.4% for the operational income.

Figure 1: CISL income of principal operations in past year

Source：Phillip Securities

CISL is undertaking two projects at present, namely 2.5 million tons hot-rolled steel plate project and around 1.8 million tons wide and heavy plate project. These two projects were both planning to start commissioning in late half of 2009, and put into commercial operation at the end of 2009, at that time, CISLs production capability will add 140% or above than current 3 million tons.

Figure 2: Price trend for 16-20 mm plate of moderate thickness in Chinas key areas.

Source：United Iron

Risk

1. Steel industry policy change deteriorates the Companys performance volatility.

2. Material price increase imposes production cost pressures for the Company.

3. New projects operational risks.

Valuation

Benefited from steel price gain and market demand expansion, we estimate the income growth for Companys principal businesses in 2008 and 2009 will be 34% and 15%, and meanwhile, the new project of trial production at the late half of 2009 will also deliver certain production contribution. In addition, the Companys 15% preferential tax rate will also be extended to 2010. While considering the above mentioned reasons, we anticipate the Company will respectively achieve EPS RMB 0.36 and RMB 0.37 in 2008 and 2009.

On the aspect of valuation, the United States steel enterprises current average P/E is 11, while for Asian market, the figure is 10.Therefore, for CISL, because of the Companys project of trial production in 2009, we conservatively give the Company 10 times P/EX 2008 (exchange rate used for valuation is HK$ 1 = RMB 0.882).The Companys 6-month target is at HK$ 4.08, and 28.03% higher than current price. We give CISL “Buy” rating.。

Financial Date