Largan (3008 TT) (Underperform)8 Coldest Nov.; rev -29% YoY; -23% MoMAllen Chang Nov revenue fell 29% YoY, bringing 11M18 revenue to -3% YoY, slower than street’s already revised 2018 rev. growth of -1% YoYShorter strong season cycle: monthly revenue turned negative MoM in Oct 2018 vs Dec in 2017, and no negative MoM in 2H16.Street cut 2018 rev growth to -1% YoY from +32% YoY (consensus in Jan). Street expects rev at +17% / +17% YoY for 2019 / 20E. More cuts to come.US Oil Supply: Dollars and Sensitivity9 Angang Steel (347 HK) (Initiating coverage with Underperform)10 Angang Steel (A-Share) (000898 CH) (Initiating coverage with Underperform) 11 Baoshan Iron & Steel (A-Share) (600019 CH) (Initiating coverage with Outperform) 12 China Oriental Group (581 HK) (Outperform)13 Elite Material (2383 TT) (Outperform)14 Maanshan Iron & Steel (323 HK) (Initiating coverage with Outperform) 15 Maanshan Iron & Steel (A-Share) (600808 CH) (Initiating coverage with Outperform) 16 MacVisit: Victory17 The Chiba Bank (8331 JP) (Neutral)18 LG Corp (003550 KS) (Outperform)19 Astro Malaysia Holdings Bhd (ASTRO MK) (Outperform)20 Malaysia Banks21 2 Please refer to page 161 for important disclosures and analyst certification, or on our websitemacquarie/research/disclosures.5 December 2018 China/Hong Kong EQUITIES China steel supply demand modelSource: MySteel, Macquarie Research, December 2018InsideKey investment thesis 5Top pick: Magang; OP: China Oriental,Baosteel;UP: Angang 8Supply – increasing EAF provides cost push 13Demand – Upside for long from infra;headwinds for flat from auto/machinery 33Prices – Long steel to outperform flat 52Appendices 72Company notes 78 Top pick Magang; Buy China Oriental,Baosteel; Sell Angang Source: Bloomberg, Company data, Macquarie, Shareprices at close 30 November 2018 Analysts Macquarie Capital Limited David Ching, CFA+852 3922 1823david.ching@macquarieBryan Wang +852 3922 3589bryan.wang@macquarie Macquarie Capital Limited, Taiwan Securities BranchCorinne Jian, CFA+886 2 2734 7522corinne.jian@macquarieSteven Yang +886 2 2734 7528steven.yang@macquarieChina steel sector Going ‘long’Key points We initiate on the China steel sector as capacity closure and rising electricarc furnace on replacement projects means less downside to steel prices. We prefer long steel on infrastructure stimulus and quicker supply responseas ‘visible hand’ of govt drives supply polices and as output cuts fade picks: Magang as prime beneficiary of long steel and industryconsolidation; OP: China Oriental, Baosteel. UP: Angang. EAF replacement means better cost support for steel pricesWe initiate on the China steel sector and see net closures of 3%/1% of steelcapacity in 2018/19E after ~325mt (26%) closure of outdated/illegal capacity inthe past four years, driven by 140-150mt of further govt-led closures. Yet thesupply side policy has shifted to ‘capacity replacement’ mode from 2018,requiring a net reduction of iron ore/coking coal-based blast furnace (BF) capacitywhile scrap-based electric arc furnace (EAF) can have equal replacement, givenfewer emissions. We thus see net 11% closure of BF vs net +26% EAF addition,pushing EAF output to 13% of total by 2020E (7% in 2016). But we see scrapprices staying high on limited domestic availability; BF-EAF margins could remainRmb500/t near term until China’s scrap shredding capacity ramps up, thusproviding cost support and helping stablize prices/margins (especially rebar).Differentiated winter production cuts to benefit cleaner millsAlthough we estimate this winter’s production cut tonnage at +20% YoY, moreflexibility has been given compared with prior years, especially to mills with ultra- low emissions and the extent of the imposed cuts is more weather/ pollutiondependent. Our proprietary China Steel Survey reflects near-term headwinds ascuts so far have not strictly been enforced by local governments, with utilization~75% vs. ~60% in Dec 17. However, we expect more stringent execution soongiven pollution levels have already doubled YoY in Northern China.Demand–infra stimulus to benefit long; Invisible hand back in powerContrary to the market’s view of a 5-10% demand drop, we see 0-1% growth in2019-20E from 2018E’s 3%. While flat steel (30%) is hurt by slowing China autosales and trade war impacts on white goods/machinery, our property analyst isrelatively optimistic on property demand in 2019. While GFA sales could drop 5- 10% in 2019E, we believe construction demand will still see low single-digitgrowth given delayed construction progress in 2018. In line with our economist’s(Desk Strategy) view, we also see a pick-up in infra projects (esp. railway/subway) from 1Q19, further boosting long steel demand. With reduced govtsupply side efforts, steel prices could be more driven by the market’s ‘invisiblehand’. We believe long steel will outperform flats given 1) infra stimulus; 2)quicker supply response (reduced production from EAF/ non-SOE if margindrops) - we see rebar-HRC margin spread Rmb300/t in 2019 on average. Stock picks; buy Magang, China OrientalWe like exposure to long steel and potential beneficiaries of industryconsolidation. Our top pick is Magang, with 48% exposure to long steel, lowestvaluation at 4x 19E PER. We also like China Oriental with its 52% exposure tolong but its Tangshan capacity is most susceptible to output cuts, in our view. Weare also OP on Baosteel for its focus on high-end products (price stability) andincoming synergies from the Wugang merger. We rate Angang UP given 80%flat and 40% sales in North East China amid a poor demand outlook. mnt2015201620172018E2019E2020E Production851864855883881886 yoy%-1.5%1.5%-0.9%3.2%-0.3%0.6% Net export11510668605651 yoy%25.6%-7.9%-36%-12.3%-6.3%-9.9% Demand 737760794820821832 yoy%-5.6%3.1%4.4%3.3%0.2%1.3% Capacity1,2701,1901,005954936929 yoy%5.8%-6.3%-15.5%-5.1%-1.9%-0.7% Utilization %67.0%72.6%85.1%92.6%94.1%95.3% MagangBaosteelCOAngang 323 HK600019 CH581 HK347 HK RatingOPOPOPUP TP4.88.38.15.5 Upside33%24%61%-14% 19E P/E3.76.13.66.9 20E P/E3.75.63.75.8 19E P/B0.80.80.80.7 20E P/B0.70.80.70.6 19E EV/EBITDA2.03.31.14.6 20E EV/EBITDA2.13.10.64.1 19E ROE%22%14%24%10% 19E Net gearing-1%5%-41%16% 19E div yield %10%9%6%4% 18E EPS 0.890.911.321.00 vs cons.4%-7%-8%-6% 19E EPS0.871.101.240.83 vs cons.14%6%-10%-18% 3 Please refer to page 11 for important disclosures and analyst certification, or on our websitemacquarie/research/disclosures.5 December 2018 Greater China EQUITIES Fabless inventory daysSource: Bloomberg, Macquarie Research, December 2018Semiconductor stock picksCompany Ticker RecMkt capUS$bnPrice(lcy)TP (lcy)TSR(%)TSMC2330 TT O 198.5235.00 270.0019%Hua Hong 1347 HK O 2.917.78 33.0088%SMIC981 HK O 4.87.4212.00 62%ASEH 3711 TT O 9.164.5070.00 15%MediaTek 2454 TT O 12.7245.50300.00 27%GWC 6488 TT O 5.3375.00400.00 14%Silergy 6415 TT O 1.6535.00600.00 14%Parade 4966 TT O 1.3498.00700.00 44%Aspeed 5274 TT O 0.7619.00700.00 17%UMC 2303 TT U 4.711.70 9.00-20%Source: Bloomberg, Macquarie Research, Dec 2018.Prices as of 3 Dec 2018. TP and EPS changesCompany Ticker Rec Old TP New TP2019E EPSchangeTSMC 2330 TT O 315 270 -11%UMC 2303 TT U 10 9 -5%Vanguard 5347 TT N 68 60 -3%ASEH 3711 TT O 85 70 -16%MediaTek 2454 TT O 350 300 -15%Source: Macquarie Research, Dec 2018. Analysts Macquarie Capital Limited, Taiwan Securities Branch Patrick Liao +886 2 2734 7515patrick.liao@macquarieLynn Luo +886 2 2734 7534lynn.luo@macquarie Macquarie Capital LimitedAllen Chang +852 3922 1136allen.chang@macquarieSemiconductorsInventory days remain at a high levelKey points We forecast fabless inventory days to remain at a high level of 75/73 days in4Q18/1Q19E, higher than 5 year average of 70 days, given weak demand. We expect a weak 2019 and further cut our estimates and TP on TSMC,UMC, Vanguard, ASEH, and MediaTek. Top Sell: UMC. Top Buys: TSMC, Hua Hong, SMIC, ASEH, MediaTek,Silergy, Parade, Aspeed.Fabless inventory days to remain at a high level in 4Q18-1Q19F