-Taiwan Steel Group Profile

Transcription

1 -Taiwan Steel Group Profile 1

2 Preface Taiwan's industries are generally characterized by their detail-oriented division of labor. In an era of high economic growth led by an export boom, it has been the main industrial development theme in the past decades for companies to achieve growth by increasing scales of production and marketing in all areas. With slight carelessness, past investments in production capacity and channel inventory might become burdens on operations; Taiwanese companies were obviously under pressure from losing orders, particularly due to the overspill effect of China's production overcapacity. As Taiwan experiences a transformation, one of the feasible countermeasures is to integrate the industrial supply chain by complementing one another's needs, reducing investment duplication for effective use of resources, and enhancing operational performance with delicate operations management. I. Types of Issues Taiwan Steel Group Is Resolving Currently, Taiwan Steel Group owns shares of six companies, including E-Top Metal Co., Ltd., E-Sheng Steel Co., Ltd., Quintain Steel Co., Ltd., TMP steel Corporation, Chun Yu Works & Co., Ltd. and OFCO Industrial Corp. The companies' respective positions in the industrial chain are shown as follows: Company Name Position in Industrial Major Products Chain E-Top Metal Co., Ltd. Upstream - Electric furnace steelmaking Steel billets, reinforcing steel bars E-Sheng Steel Co., Ltd. Upstream - Electric furnace steelmaking Steel billet, reinforcing steel bars, section steel TMP Steel Corporation Downstream Molding and processing of reinforcing steel bars Quintain Steel Co., Ltd. Midstream Wires (Strategic alliance) Chun Yu Works & Co., Downstream Screws Ltd. OFCO Industrial Corp. Downstream Screws 1. Integrate Value of Steel Industry With E-Top Metal Co., Ltd. and E-Sheng Steel Co., Ltd. as the basis, Taiwan Steel Group adopted a mergers and acquisitions (M & A) strategy in recent years by integrating OFCO Industrial Corp. (5011) and Chun Yu Works & Co., Ltd. (2012) and forming a strategic alliance with Quintain Steel Co., Ltd. (2017) through an 2

3 appropriate equity holding strategy to join its Board of Directors. In addition, Taiwan Steel Group gradually completed overall top-down deployment in the screw industry business group. In addition, in the aspect of its original key reinforcing steel bar products, the Company also acquired TMP Steel Corporation (6248) and transformed it into a steel molding and processing plant to directly enter the sales market for the construction industry and quickly grasp the sales channels of steel products. Since then, Taiwan Steel Group has optimized the production and marketing systems for two business groups, screws and reinforcing steel bars, so the production capacity of E-Top Metal Co., Ltd. and E-Sheng Steel Co., Ltd. in the upstream can be effectively utilized. In the aspect of raw material sourcing, the companies within the group in the midstream and downstream also have stable sources of raw materials, in terms of both price and quantity. Without worries on the back end, the management team may focus their efforts on operational management and mid-term and long-term operational planning, to accumulate the Group's strength by enhancing long-term operating performance. 2. Increase Board of Directors' Shareholding Ratios and Strengthen Corporate Governance In the process of integrating the steel industry value chain, Taiwan Steel Group adopts an M & A strategy to not only reduce the capital expenditures for building factories on its own and time opportunity costs but also be more responsive to the timing of macroeconomic growth and declines with rapid deployment of resources for building the Group's development blueprint. With successive acquisitions of OFCO Industrial Corp., Chun Yu Works & Co., Ltd. and TMP Steel Corporation and a strategic alliance with Quintain Steel Co., Ltd., after Taiwan Steel Group joined their Director and Supervisor teams, its Director and Supervisor shareholding ratios of OFCO Industrial Corp., Chun Yu Works & Co., Ltd. and TMP Steel Corporation and Quintain Steel Co., LTD., increased to 14.14%, 27.85%, 48% and 17.54%, respectively. Strong Director and Supervisor shareholding ratios enhance the stability of long-term operations. Taiwan Steel Group's reasons for acquiring shareholding rights have always been focused on the considerations of long-term industry development as well as providing a strong backing to support the management team's implementation of operational management. Furthermore, the members of Taiwan Steel Group are all steel lovers; from senior personnel who have dedicated themselves for decades in the industry and members serving as Directors of the Board to Independent Directors elected, they are all the 3

4 best in their respective fields; thus, in the aspects of business strategy, corporate governance, etc., they can provide high-quality procedures and professional advice to maximize shareholders' interests. 3. Optimize Production and Marketing Management and Obtain Stable Cash Flows The operational performance of the steel industry not only emphasizes equipment, technology and certification, but is also dependent on the detail-orientation of production and marketing management. Starting from the procurement of scrap iron materials, the quality of materials affects the output costs of reinforcing steel bars, and the impacts on gross profits can be as high as 3-6%. Both E-Top Metal Co., Ltd. and E-Sheng Steel Co., Ltd have always paid attention to the management of material procurement. In recent years, more emphasis has been placed on improving energy utilization and debottlenecking of production technology to reduce production costs and maintain profitability of products. In the long run, under good production management, coordinated with the M & A strategy and implementation of upstream and downstream channel deployment, products are effectively closed out, so excellent performance in the aspects relevant to quality management, including inventory turnover and accounts receivable turnover, has been maintained. Hence, by using stable annual cash flows as its backing, Taiwan Steel Group is able to plan investments on production capacity and take steady steps towards M & A. 4. Rediscover Value and Enhance Enterprise Market Capitalization During the M & A implementation process, in addition to the target company's relative position in the industry and its complementarity, Taiwan Steel Group also pays attention to the valuation of its M & A target. The items to be considered for valuation include brand, channels and certification, all of which can be included when calculating the reasonable bargaining range and discussing the opportunities for post-integration industry cooperation with M & A targets or strategic alliance partners. In addition, the steel industry require intensive capital and large space, the comparison among the replacement costs of the production line, plants and land, and enterprise net worth or stock prices matters even more. During this process, in addition to exploring and examining the value of the M & A target, after acquiring the M & A target with effective funds, accompanied with inputs of the Group's resources and management energy, when the M & A target's overall market capitalization is reflected in the business performance, it is tantamount to the rediscovered value of the target company in the capital market. 4

5 II. Current Status (Actual Performance) Judging from the financial statements of the four listed and OTC companies with shares owned by Taiwan Steel Group, the revenues of OFCO Industrial Corp. and TMP Steel Corporation have been increasing gradually in recent years; although Chun Yu Works & Co., Ltd.'s 2015 annual revenue showed a decline, through product portfolio optimization and reinforced control of raw material procurement, its 2016 annual revenue started a growing trend enabling a steady profit growth. The latest period (2016) of cash dividend proposed by the Board of Directors is NT$ 0.75 per share, which is a significantly increase compared with the fixed cash dividends of NT$ 0.50 per share in the previous periods. Unit: NT$ in 1,000's; EPS & dividends (Dollars) Unit: NT$ in 1,000's; EPS & dividends (Dollars) OFCO TMP Operating Revenue 995, ,683 1,034,105 Operating Revenue 1,028,032 1,336,182 1,749,925 Gross profit 125,423 82,299 note1. Gross profit 42,463 92,446 note1. Gross profit margin 12.60% 8.52% note1. Gross profit margin 4.13% 6.92% note1. Net Profit 59,595 52,006 note1. Net Profit 24,245 51,964 note1. EPS note1. EPS note1. dividends dividends Note1.Waiting for the Auditing and Certification of Financial Statements by CPA Note1.Waiting for the Auditing and Certification of Financial Statements by CPA Unit: NT$ in 1,000's; EPS & dividends (Dollars) Unit: NT$ in 1,000's; EPS & dividends (Dollars) Quintain Chun Yu Operating Revenue 5,900,408 4,797,729 4,404,617 Operating Revenue 9,176,591 8,560,902 8,617,980 Gross profit 367, ,836 note1. Gross profit 1,404,737 1,401,940 note1. Gross profit margin 6.22% 7.52% note1. Gross profit margin 15.31% 16.38% note1. Net Profit (41,341) (69,827) note1. Net Profit 188, ,329 note1. EPS (0.52) (0.59) note1. EPS note1. dividends dividends Note1.Waiting for the Auditing and Certification of Financial Statements by CPA Note1.Waiting for the Auditing and Certification of Financial Statements by CPA As for Quintain Steel Co., Ltd., of which the Group just stepped into the Board of Directors in 2016, with the help of strategic alliances forming and benefiting from the economic upturn in the steel industry, it was able to get out of the red in The Board of Directors is expected to propose a cash dividend plan of NT$ 0.35 per share for resolution at the shareholders' meeting, aiming to achieve the first payment of dividends in three years. Overall, the operational status of each of the abovementioned companies has shown a steady growing trend, after Taiwan Steel Group joined their management teams. III. Scale of Opportunities The 2016 total annual operating income of Taiwan Steel Group, including its ownership of E-Top Metal Co., Ltd., E-Sheng Steel Co., Ltd., TMP Steel Corporation, Chun Yu Works & Co., Ltd., and OFCO Industrial Corp. and its strategic alliance with Quintain Steel Co., Ltd., is more than NT$ 20 billion. 5

6 Expanding from the current revenues as the basis, Taiwan Steel Group has three major directions for the planning of its overall revenue growth: 1. Plant Expansion to Increase Production Capacity and Upgrade Products After acquiring complementary strategic partner through M & A, Taiwan Steel Group assesses the next stage's production capacity and product upgrade requirements. E-Sheng Steel Co., Ltd. has already invested NT$ 1 billion, adding one small section steel rolling production line, which is expected to enter formal production operation in the first quarter of 2018 when the annual output is expected to increase to reach 240,000 tonnes. E-Sheng Steel Co., Ltd. is one of the few continuous-production small-scale steel production plants (including continuous production in electric furnace, steel rolling) in Taiwan. After the completion of this equipment upgrade and modification project, not only can the monthly production capacity double from 10,000 tons to 20,000 tons, but also the range of products will cover all items including angle, channel, flat, square, and round steel. Then, in terms of product precision and complete size range, the Company is expected to be on a par with the market leaders, thus becoming a great help in the the Group's revenue growth. 2. Steady Growth in Midstream and Downstream As for companies positioned in the midstream or downstream, including 6

7 Quintain Steel Co., Ltd., Chun Yu Works & Co., Ltd., OFCO Industrial Corp. and TMP Steel Corporation, their product portfolios shall be optimized to increase their competitiveness and continue their trends of steady revenue growth, with the stable supply of raw materials from E-Top Metal Co., Ltd and E-Sheng Steel Co., Ltd. in the upstream, along with the expected product upgrade by E-Sheng Steel Co., Ltd. 3. Entering Market of Stainless Steel Products Taiwan Steel Group's M & A activities in the past few years have completed an integrated production and marketing structure for plain carbon steel products. Backed by the Group's stable cash flows, and accompanied by successful experience accumulated in recent years' M & A activities, the next stage's goal is to enter the market of stainless steel products, aiming to step beyond the field of carbon steel and horizontally integrate the specialty steel industry. Currently, Gloria Material Technology Corp. (stock code 5009, hereinafter referred to as GMTC) is the M & A target. GMTC is the technology leader in Taiwan's specialty steel industry, with 2016 annual revenue of NT$ 8.74 billion, and its product technology has always been recognized by the market. If integration with GMTC is successful, it will help boost the production technology of Taiwan Steel Group; GMTC would also have access to Taiwan Steel Group's fully deployed channels and create a better future together. After the abovementioned stage is achieved, Taiwan Steel Group will become the first domestic company to have integrated the plain carbon steel industry with the specialty steel industry, and it is expected to become a steel group with annual revenue of NT$ 50 billion. Then, Taiwan Steel Group will be placed among the major domestic steel groups. While the benefits are being integrated, the goal is to let all companies within the Group and the strategic partners share resources of the big ones get bigger" in the industry, to enhance the business performance. In summary, in recent years, there were three major reasons why Taiwan Steel Group successfully created its Group territory: 1. M & A activities were backed by stable cash flows created by management capabilities; 2. The selection strategy for M & A target and project execution ability; 3. While adopting the M & A approach, better implementation timing was grasped during economic fluctuations, to save time costs on building its own plants and business development in the market. There is long-standing consensus that the Taiwan industry needs integration to recreate competitiveness; to implement M & A from the level of an industrial holding 7

8 company requires meticulous execution to gather crowds and strength to play "World Cup". The timing of Taiwan Steel Group's M & A activities coincided with a production capacity adjustment period of the steel industry; while the Group's territory creation was reaching completion, the supply-side reform in China has also entered its acceptance period; the focus of China's steel industry production capacity adjustment was mainly on reducing the production capacity of medium-frequency induction furnaces on a lower production technology level; this adjustment was expected to stabilize prices of scrap iron raw materials and let prices of small steel billet products gradually rise, so the industry players can show off their talents in production and marketing management and thus enhance their profitability. Looking into the future, the benefits arising from Taiwan Steel Group's M & A shall gradually reveal themselves. 8