4Q06 net profit of S$32.4m (up 317% yoy) is in line with our and consensus expectations. 4Q05 saw the last bottom of steel prices in China, with prices up some 15% since then. 4Q06 revenues rose 25% yoy to S$229.5m. For the full year, Delong saw net profits of S$131.2m (up 8% yoy) on the back of a 10% yoy topline growth to S$945.3m.  4Q05 saw the last bottom of steel prices in China, with prices up some 15% since then. 4Q06 revenues rose 25% yoy to S$229.5m. For the full year, Delong saw net profits of S$131.2m (up 8% yoy) on the back of a 10% yoy topline growth to S$945.3m. 

Higher COGS squeezed margins qoq in 4Q06. Higher cost of raw materials like ore and coal prices squeezed steel margins to 16.9%, down 3.6% pts qoq. As the rise in raw material costs was marginal, Delong absorbed it out of goodwill as per previous guidance by management. We are expecting contracted ore prices to rise 10% in Apr 07. However, Delong will be able to pass the cost on to customers. 

S$77m worth of cost saving initiatives for FY07. This was recently pledged by Delong to improve profit margins and raise the group?s efficiency metrics (recycling water and waste emissions). In Jan 07, it also announced plans to expand its HRC capacity further (to 3mt by end FY07 from 2.4mt) and defer its CRC expansion indefinitely. Both these initiatives indicate to us that Delong is scrambling to stay well above government benchmarks, which determine the fate of mills. Generally, policy is out to reduce the number of small and inefficient mills. 

Raising EPS estimates by 4% and 22% for FY07-08. We have raised our ASP and GP assumptions for FY07 slightly and imputed the impending rise in capacity to 3mt for FY08. We also introduce our FY09 numbers. The risks for Delong are 1) the volatility of steel prices and 2) execution errors upon implementation of its cost saving initiatives.

Raising target price to S$0.25 from S$0.23 (7x CY07 P/E maintained). This sets Delong roughly in line with its Asian peers? historical average. Delong will enjoy the full year benefit from the Dec 06 capacity expansion (from 1.6mt to 2.4mt). Beyond that, we believe there will be enough expansion opportunities (organic and via acquisitions) to catalyse its stock price. A 1.5 Scts dividend representing a 60% payout (vs. our expected 20%) was declared. This will be paid in two tranches (0.6 Scts in May 07 and 0.9 Scts in 2H07). Maintain Outperform.