• Tough outlook for steel players. Many steel firms in Asia are bracing up for a tough second quarter with lower profit guidance and output cuts. However there is still a glimmer of hope that demand, might improve in the second half of 2009 should the global economy recover.

• Oversupply of steel. Steel markets are starting to look oversupplied as inventories in China, the world’s largest steel consumer, have reached record high levels. Steelmakers around the world have been cutting production to curb with the sharp fall in demand triggered by the global recession. So far worldwide steel output has dwindled by a whopping 24% this year, indicating overproduction.

• Falling steel prices. Asian steel prices have fallen by more than 50% to below US$500 a tonne, from 2008-highs and are still set to slide further due to sharp falls in demand and the slumping price of iron ore, which is a key ingredient in steel making.

• Diminishing demand for structural steel. Structural steel products, particularly steel plates continue to be badly hit by the steel slump with sharp falls in demand being increasingly apparent.

• Financing matters. As of 31-Dec-08, the Group has about S$57m worth of debt borrowings that are due within 12 months. Should HupSteel be able to collect its outstanding receivables promptly, refinancing is not likely to be required. Total receivables amount to about S$85m as of 31-Dec-08.

• Effort to improve cash position remains to be seen. Management previously mentioned that they intend to improve HupSteel’s cash position going forward via stricter debt monitoring and an inventory reduction strategy aimed to reduce total bank borrowings. The result from the effort remains to be seen in the Group’s 3Q09 results which will be out in May-09. As of 31-Dec-08, the Group has about S$21m worth of cash and its equivalent.

• Order flow. We expect the flow of new orders to slow in 3Q09 from the Group’s customers due to the negative effects of this recession. However HupSteel usually operates on a spot sale basis, so there is no worry of order cancellations.

• Further provisions may be made. In light of weaker selling prices, we feel that HupSteel may have to made additional provisions for inventory, causing a drop in overall profitability.

• Weak 3Q09 earnings expected. Though we have not gotten guidance from management, we expect lacklustre earnings for 3Q09 due to the continuation of the global steel slump.

• Cash conservation likely suggests lower dividends. Dividend payout is likely to fall under FY2008’s as the Group conserves cash to pay off its outstanding liabilities and to sustain its operations throughout the tough macroeconomic environment.

• Maintain SELL. We maintain our Sell recommendation and earnings forecasts for now. Our target price stands at S$0.10 based on 2.5x P/E which is the industry average as we factor in the ongoing steel slump and lower dividends for FY2009.