Japan Steel Works (5631.T): Benefits from tight supply-demand in gas turbines/nuclear intact; cost assumptions revised; new TP of ¥11,500; Buy

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Japan Steel Works (5631.T): Benefits from tight supply-demand in gas turbines/nuclear intact; cost assumptions revised; new TP of ¥11,500; Buy

Goldman Sachs Japan Steel Works (5631.T)

Solid edge in large special steel products for gas turbines and nuclear power

Japan Steel Works has the capacity to cast and forge steel ingots of up to 670 tonnes,

among the largest in the world. We estimate the company holds a high share supplying

global OEMs large shafts for gas turbine combined cycle (GTCC) power generation and

primary system components for nuclear power, where high strength and safety are

required.

The large special steel industry has extremely high barriers to entry, and supplier

switching costs for heavy electrical equipment OEMs are substantial. In the current

environment, where global OEMs are broadly benefiting from a buildup in order

backlogs and improved margins at the time of order receipt, our view remains

unchanged that the company, which holds structural competitive advantages within the

global power capex expansion theme, is well-positioned to benefit from growth in

shipment volumes and price improvements.

We estimate that the upward price trend for large gas turbine and nuclear-related

components supplied by JSW is ongoing. On a shipment volume basis, we do not expect

large shafts or nuclear primary system components to exceed the peak levels seen in

around 2010. However, we expect the material & engineering business OPM to surpass

its historical peak, as unit price improvement has advanced considerably compared to

the previous cycle.

Exhibit 1: Japan Steel Works: ASP (sales in power & nuclear Exhibit 2: Japan Steel Works: Trends in M&E OP and OPM

applications/major product volume)

(JPY mn) 2-year moving ASP (JPY mn) Material and Engineering OPM (rhs)