General Steel Holdings (NYSE:GSI)

General Steel Holdings near-term growth to be impacted by China's tightening measures

Excerpt from Rodman & Renshaw report:

Expect Modest Y-o-Y Volume Growth in Longmen; ASP Weaker: We expect GSI’s 2Q10 performance to be impacted by China’s tightening policies that were executed over the quarter. We are still expecting shipment volume from Longmen JV in 2Q10 to grow modestly at ~5% Y-o-Y to ~886,000 tons, helped by the company’s presence in western China, where GDP growth is outpacing the national average. Longmen facility is estimated to account for ~95% of total shipment volume during the quarter. ASP should be expected to be weaker due to overall slowdown in construction activity. We expect average ASP for GSI in 2Q10 to be ~RMB 4,250 (ranging from ~RMB 4,500 to ~RMB 4,000 between April and June).

Margin Pressure Remains: Historically 2Q and 3Q have been stronger quarters for GSI due to a ramp in quarterly shipment volume and stronger price environment. However, tightening driven slowdown in demand for infrastructure and construction steel should impact margins and profitability (at least in 2Q10).

Model Adjustments: We are revising our financial projections to better reflect current demand environment. We are now projecting 2Q10 revenue and gross profit of $498.3 MM and $10.0 MM, with US GAAP net loss of ($6.4 MM), compared to our prior estimates of $483.8 MM, $26.6 MM, and positive net income of $7.5 MM. For full year FY10, we expect the company to deliver revenue and net loss of $1.96 BB and ($8.5 MM), with US GAAP EPS of ($0.16). We are also introducing our estimate for FY11. We now project a revenue and net income and EPS of $2.02 BB, $29.7 MM, and $0.55, respectively based on US GAAP.

Consolidation Remains Key To Story: At a policy level China continues to target elimination of backward steel capacity through consolidation but the pace of executing this mandate has been much slower than our expectations. We believe concerns around employment losses and impact on provincial revenue generation via taxes on this large industry have been difficult issues to overcome. In relation to GSI, we believe it is becoming increasingly important for management to execute on its M&A strategy as it positions itself as a consolidator. We believe that entities that survive the industry consolidation should benefit from being able to deliver on profitability more consistently compared to the current volatility in earnings. 

Lowering Price Target: We are lowering our price target on GSI from $5.00 to $4.00 driven by the above adjustments. We maintain our Market Outperform rating on GSI driven by substantial infrastructure work being carried out in Western China that should support the company’s growth. We believe that growth in 2010 will primarily be organic. Based upon our new projections, GSI is currently trading at a P/E multiple of ~5.4x to our FY11 earnings estimates while on EV/EBITDA basis, it is trading at ~7.2x and ~3.3x to our FY10 and FY11 forecasts. At our new $4.00 price target, GSI would trade at a forward FY11 P/E multiple of ~7.3x and EV/EBITDA multiple of ~4x, compared to the industry averages of ~11x P/E and ~5.5x in EV/EBITDA.