Action

We upgrade the company from HOLD to BUY and lift TPby 50% to Rmb4.5 （1.5x 2016e P/B or 7.5x EV/EBITDA）。

We raise 2016/17e earnings from -Rmb1.7bn andRmb520mn to Rmb2.37bn and Rmb2.47bn, respectively.

Reasoning

A year of turnaround for the steel industry; strong,sustainable recovery in profitability. In 2016, steel pricesrebounded sharply driven by demand recovery, limited supplyand low inventories. Steel mill profitability recovered strongly,and we think the recovery in profitability has some sustainability.

Anti-dumping move to push up domestic grain orientedsilicon steel prices. The company has 500kt of grain orientedsilicon steel production. An Rmb1,000/t increase in prices wouldboost its EPS by Rmb0.015.

Internal cost reduction via SOE reform. The companyproposed cutting steel business costs by Rmb7.3bn in 2016. Itwill also promote flat management and structural upgrade.

Turning profitable in 1Q16 after big losses in 2015. In1Q16, it recorded a net profit of Rmb30mn and a gross profit/t ofRmb289. We expect its gross profit/t in 2Q16 to reach nearlyRmb500.

See page 3 for details.

Earnings forecast and valuation

Given the sharp rise in steel prices and internal costreduction, we raise 2016/17e earnings from -Rmb1.7bnand Rmb520mn to Rmb2.37bn and Rmb2.47bn, orRmb0.23 and Rmb0.24 per share, respectively.

Risks

Demand recovery weaker than expected; blast furnacesresuming production faster than expected.