The US Commerce Department last week imposed preliminary duties of 99% on oil pipes from China. Complaints were brought by US Steel Corp, the US operations of Russia based Evraz Group SA and Pennsylvania based Wheatland Tube Co.
But duties will be just 36.5% for the 37 largest exporters. During 2Q09, exports accounted for just 13% of UMW Holdings Bhd’s (UMW) unit in China, Wuxi Seamless Oil Pipe Co Ltd’s (WSP) revenue - though this was a sharp drop from 60% in 1Q09.
Much of the export revenue decline was offset by an increase in demand from domestic Chinese market. Assuming exports were to fall to zero because of new import duties, we estimate UMW’s earnings to lower by 3%-4% in FY09 and FY10.
At WSP level, earnings are estimated to lower by 25%-26% over FY09-10. Bulk of the export market comprises of higher margin, non-API products. We expect export risks to be somewhat mitigated given WSP’s plan to setup a US-based, pipe production plant in Houston. We maintain our BUY call on UMW.
Our Sum-of Parts derived fair value of RM6.30/share is under review.
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