The International Iron and Steel Institute (IISI) foresees global steel production in 2007 would grow 6%. Accordingly, China will continue to be the major consumer with projected increase of 13% in 2007 followed by another 10% in 2008 consuming 35% of global total. From 2006 until 2015, global steel demand is seen to grow at CAGR of 4.2%-4.8%.

The resurgence of oil and gas development heightened the need for high-quality products for specialized end-users. T sees excellent business opportunity to participate in supplying these niche markets.

T's 96%-owned Treasure Steel Corporation (TSC) has the largest installed capacity for steel billet manufacturing in the Philippines. Other firms produce billets mainly for their own production of downstream steel products such as bars, wire rods and sections. TSC on the other hand, manufactures and sells billets to downstream end users through TKC. TKC ranks as first with annual installed capacity of 300k MT as of 2006

T's 90%-owned ZZ Stronghold (ZZ) is strategically positioned in a special economic zone in Southern China. ZZ is the first to use the latest Korean PE coating technology in China and will be having its own port facilities by 2009. This provides logistical advantage and access to target markets, both domestic and exports.

The 62% growth in our 2008 net income forecast to P324.93mn will be driven by 134% growth in sales. Our estimates for T's 2008 revenue of P14.8bn is boosted by more than doubling billet production to 375k MT, installation of a new Electronic Resistance Welded-Stretch Reducer Mill (ERW-SRM) estimated to yield 100k MT and additional available capacity of Spiral SRW to 80k MT from 23k MT. T's IPO pricing appears to be expensively valued at 28x vis-à-vis our estimated 2008 market P/E of 17x. Note that no comparative valuations can be made since T is first to list within steel category.

Based on our estimates, T's Return on Equity (RoE) would post double-digit growth after building and installing all equipments that would boost available capacity. Among which are machineries for Billets, Spiral/ERW, ERW-SRM and Seamless pipes which would all be completed 2009. We expect from a 6.43% RoE in 2007, it would increase 13.99% in 2009 and 16.32% in 2010.

Steel production involves the process of mixing raw materials (iron ore, coal, powdered coke, limestone and etc.) in a mixer, which are then fed to the rotary sintering/burner machine. The sintered iron is then charged to the blast furnace until it reaches its melting point . It is then oxidized via the Bessemer Oxygen Furnace and refined using the electric arc furnace. The molten steel is fed to a casting machine and are mold to form the required billet shape and size. Based on this process, it is clear that T's operation is largely dependent on electricity. Any disruption in power supply might require T to curtail or shutdown operation. This might give rise to additional cost, loss of production and decrease in production yield. If T operates at 95% of capacity, this would translate to 10% decline in forecasted 2008 bottom-line.

TSC operates the plant of former National Steel Corporation (NSC), which sustained Iligan City's livelihood way back 1990's. However, the Asian financial crisis struck NSC's financial capability with rapid increase in interest rates, drastic depreciation of the foreign exchange and decreasing sales which was brought about competition from cheaper imports. T has yet to defend its stance as local steel producers already expressed concerns of losing their markets since China might dump steel into the Philippines, and China's huge demand for steel would decline post Beijing 2008 Olympics.

T employs import parity pricing (IPP) where it sells goods locally at the same price customers would pay if they were to import the same goods from another country. IPP sets prices at world price multiplied by relevant exchange rate, plus tariffs and transport costs. Peso strengthening would decrease the price T can set and competition in case of tariff free imports could arise, unless anti-dumping measures are solicited from government.