1. Steel Dynamics (Nasdaq: STLD)
Jason Zhao | Kitty Chen | Frank Wang
Presented, April 27,2017

2. Outline Business Introduction Industry & Economic Analysis
Company Analysis
Financial Analysis
Valuation and Recommendation

3. Business Introduction

4. Introduction: Steel Dynamics Executive Summary
Company Data
Industry
Steel & Iron
Current price
$36.61
52 weeks price $
Market Cap
8.87 Billion
PE ratio
23.47x
Shares Outstanding
242.3 Million
Vulcan Acquisition
Trump Election
Flat Roll Steel Mill Acquisition
SBQ Expansion
Steel Deck Assets Acquisition
Investment Thesis
[+] US steel market has been recovering from a cyclical low point of both volume and aggregate price levels
[+] Leading market share, lowest cost producer and healthiest financial conditions
[–] The cyclical dynamic nature of whole steel industry
[–] Great pricing pressure coming from global steelmaking overcapacity
Recommendation: Watch List
Shareholder Information
Source: Bloomberg

5. Introduction: Steel Dynamics Business Overview
Business Model
Percentage of Segment Sales
15 % of 2016 Revenue
Consumed
Internally
61% of ferrous were internally shipped to STLD
One liquid iron production
72% of 2016 Revenue
STLD Segment Growth (in thousands)
6 EAF steel mills, 11 steel coating lines, 1 downstream SBQ processing facility
9% of 2016 Revenue
STLD Provides downstream value-added “pull-through” steel volume
Source: STLD Investor Presentation & STLD k

6. Industry & Economic Analysis

7. Construction Spending, Automobile Sales and Manufacturing Industry are Key Economic Drivers
Steel and iron Industry has been recovering from industrial recession in 2015 (MII)
There are three major factors that drive industry to grow ：
Booming equipment manufacturing industries – PMI Index
Increasing demand for new vehicles
Increasing spending on construction (residential, commercial and rail road)
Metal Industry Indicator (MII) Indicates Strong Recovery
Rising 50+ PMI Implies Increasing Basic Metal Demand
5-year Vehicle Sales (In Millions)
Value Of Total Construction Spending (In Billions)
Source: Bloomberg | US Census Bureau ( | USGS (

8. The Key Industry Challenges Come From Both Cyclicality and Overcapacity
The Price Of Input And Finished Goods Are Very Volatile
The Price Of Input And Finished Goods Are Very Volatile
The Supply Has Exceeded Demand For Years
The Supply Has Exceeded Demand For Years
The Energy Price (Coking Coal) Is Also Very Volatile For Years
The Energy Price (Coking Coal) Is Also Very Volatile For Years
The Utilization Has Been Under 80% Since Year 2008
The Utilization Has Been Under 80% Since Year 2008
Varying input, energy and product prices indicate high cyclicality of our industry
Steel companies should lower their operating leverage to reduce risks
The industry has been oversupplying for years
Companies need to focus on increasing the proportion of value-added products and improve its efficiency
Source: Bloomberg | AISI ( | IBIS World

9. Industry & Economics: Growing Concerns on Chinese Imports
Although the threat from Chinese imports is controllable and limited, …
Estimated Impacts of Tariffs
Only 4% of imported steel products from China calculated in value
Less competitive on value-added products currently
Imposed tariffs (Anti-dumping duty may up to 266%)
Trump’s potential actions to curb steel import
…, it may have even greater impact in the long run
China’s capability to produce value-added products will increase substantially with the policy guide
Lower-priced Chinese steel with improving will penetrate the US domestic steel market
Source: U.S. Imports for Consumption of Steel Products (FT900A)( | 2017 Investor Presentation | IBIS World (

10. Impact of the Trump Administration: Fair Reaction or Over-optimism?
Trump’s Reforms
Our Concerns
Proposed $1 trillion infrastructure spending on roads, airports , bridges and seaports
Proposed aggressive tax-cut plan that slashes tax rates for individuals and businesses
Speedy investigation on steel imports and possible executive order to ban or restrict steel imports
The implementations of infrastructure plan and tax reform are unsecured
Equity market has been overreacting to the election and promises of Trump
Several industry peers have been experienced EPS misses in 2017 Q1
One-year Industry Index (^DJUSST)
EPS Miss
Overreaction
Overreaction
Trump’s Election
Source: CNN ( | NY Times ( | Yahoo Finance

11. Industry Competitive Landscapes – Porter Five Force
Porter’s Five Forces
Threats of Substitute is medium due to cheaper nonmetallic substitutes (wood) and more expensive materials with better performance (aluminum)
Customers’ Bargaining Power is high due to low product differentiations
Suppliers’ Bargaining Power is medium due to suppliers’ control over supply contracts of key inputs (iron ore, coal, nickel)  
Entry Barriers is high due to substantial initial capital investments and large input costs to maintain existing operation
Market Competition is high due to established contractual relationships and threats from international competitors
Source: IBIS World (

12. Industry Peers at a Glance
Top Five Industry Players
Significant leverage exposure to commercial construction
Achievement in auto market
Touch in aerospace industry
Lowest cost producer in U.S.
Superior organic and external growth
Weak cash flows
Richest product mixes in U.S.
Historically structurally high cost producer
Face severe recent loss
Source: Bloomberg I Credit Suisse 2016 Steel Industry Report

13. Company Analysis

14. Percentage of Sales Tons by End Market Sales
Value-Added Product Definition
Value-added sheets are progressed from hot roll coil and de-emphasized commodity steel
STLD Has Massive Exposure to the Booming Demand Segment and Produces Value-added Products
Advantage to produce value-added products
Value-Added Product Mix
Higher margin advantage
Protection from import threats
Balance exposure to commodity risks
Percentage of Value-added products
Value-added steels accounted for 63% of Steel Operations Sales in 2016
73% of STLD’s 2016 sheet steel sales were value-added
Source: STLD Investor Presentation & STLD 10k

15. STLD Is The Lowest-cost Operation And Highest Utilization Within Steel Industry
Factors Maximizing Efficiency
Sales/Tangible Assets Comparison
Vertical integration creates scrap cost advantage for STLD steel mills and secures steady supply of qualify and just-in-time scrap
Up-to-date production tech. and management system contribute to higher utilization rate and efficiency ratio than that of steel industry
Strategic geographic locations help to lower the overall costs through freight savings
Highest Gross Margin Comparison
Greater Utilization Than Industry
Source: Bloomberg & STLD Annual Report

16. STLD has Experienced Executives and Incentive Systems to Ensure High Performance
Glenn Pushis
Senior VP
Long Products Steel Group
Served STLD for 19 years
Chris Graham
Senior VP
Downstream Manufacturing Group
Served STLD for 19 years
Mark Millett
President and CEO
Served STLD for 24 years
Theresa Wagler
Executive VP and CFO
Served STLD for 19 years
Incentive System Align Executives and Employees with the Financial Performance
Shareholder and Employee Alignment
Over 85% of Executives & Over 60% of Production Employees are compensated at risk
Bonuses are 100% tied to ROE, ROIC, gross margin, revenue growth, cost control and efficient use of assets
Profit Sharing Plan or 401k Match at Consolidated Level
8% of pretax earnings for Profit Sharing Plan and Employee Retirement Savings Contribution based on Return on Assets
Effectively unites employees at all business segments in pursuing long-term value creation
Source: STLD Investor Presentation

17. STLD is Trying to Keep a Low Operating Leverage
Steel Segment Cost Breakdown
Logic Behind STLD Cost Structures
Financial Leverage
Total Leverage
Operating Leverage
STLD maintains over 85% variable costs for all operating platforms, establishing basis for strong cash flow generation
Low fixed costs at operating level enable STLD to survive in the tough economic climate
STLD Has The Lowest Operating Leverage Within The Industry
Source: STLD Investor Presentation, JP Morgan: North America Metals & Mining

18. STLD Controls Its Financial Leverage and Has One Of the Most Flexible Balance Sheets In the Industry
The Financial Leverage (Asset/Equity) Declines As Earnings Accumulate
Financial Leverage
Total Leverage
Operating Leverage
Total Debt / EBITDA
Free Cash Flow VS. Debt Repayment
Source: STLD K | Bloomberg

19. A Good Prospective Comes with Cyclical Industry and Import Pressure from Chinese Market
Strength
Weakness
Diversified Product Mix & Value-Added Products Offering
Lowest Cost Steel Producers in the United States with High Product Utilization
High Variable Cost Structure Contributing to Lower Operating Leverage Compared with Peers
Flexible Balance Sheet and Strong Financing Capability
Secure Supply of High Quality Ferrous Raw Materials
Exposed to the Cyclical US Steel Industry
Overcapacity in the global basic metal sector
Opportunities
Recovery of US construction spending and automobile sales
Threats
A Surge in Chinese Steel Imports
Fierce Competition

20. Financial Analysis

21. Satisfactory and Improving Profitability and Assets Turnover
EBITDA Margin
EBIT / Net Tangible
EBITDA Margin Comparison
EBIT / Net Tangible Comparison
Source: Bloomberg

22. Great Working Capital Management
Inventory Turnover Days
Account Receivable Turnover Days
Inventory Turnover Days Comparison
A/R Turnover Comparison
Source: Bloomberg

23. ROCE Grows Thanks to Greater Profit Margin and Higher Asset Turnover
Return on Common Equity
ROCE Comparison
0.68
0.77 9%
1.23
2.37
14% X =
Tax Burden
Interest Burden
EBIT Margin
Asset Turnover
Leverage
ROE
Source: Bloomberg

24. Overall Challenging Conditions
Strong Balance Sheet Gives More Financial Flexibility in Growth and We Expect Future Upgrade
Current Rating
Ba1
Possible Upgrade Baa3
[-]
Volatile Industry
Total Debt / EBITDA
EBIT Margin
[-]
Overall Challenging Conditions
[+]
Low Cost Position
Interest Coverage
Free Cash Flow
[+]
Great Diversity
Moody’s (

25. Financial Analysis: STLD displays Great Liquidity
Current Ratio
Quick Ratio
Current Ratio Comparison
Quick Ratio Comparison

26. Valuation & Recommendation
(See the Spreadsheet)

27. We Recommend to Put Steel Dynamics on The Watch List for Its Potential and Risks
Comparable Value:
$ 37.7
Current Price:
~ $ 36.5
Pre-Trump Price:
~$ 28.0
DCF Price:
~ $ 21.0
Watch List
Recovering Industry
Most Efficient Company
Risky, high leverage nature
Already Price-in and being over optimistic on future