China Materials
Asia Insight: Recovery Priced
In, Time to Take Profit
With the recent rally, risk reward is less favorable.
Whilst we expect a mild recovery in property
construction, infrastructure FAI is likely to slow. We
suggest taking profit in steel & cement, we prefer
copper & gold for tight supply, and chase laggards.
Steel – great performance, time to take profit: The
sector has outperformed HSI with ~80% gain since
September 2012, during which time steel prices are up
only ~20%, largely discounting a 2Q13 demand
recovery. Although steelmakers have raised prices, due
to higher iron ore prices, further price hikes will depend
on demand recovery, which we believe will be mild.
Cement – Take profit after recent rally: We suggest
that investors take profits after the recent rally. Whilst we
continue to see a mild recovery in property construction,
we expect infrastructure demand to slow, due to: 1) a
pick-up in CPI, 2) the stabilized economy, and 3) tighter
control on LGFV activities. Sector EV/RPC valuation is
trading at mid-cycle. Our top UW idea is CRC, due to its
expensive valuation & higher supply growth in its region.
Base metals – supply is the key: We believe 2013
demand growth will have different effects on stocks,
based on their supply picture. Copper is still the most
supply constrained, even with the new supply that has
resulted in a small surplus in global concentrate supply.
We have already seen demand pick up since the final
bidding in the state grid’s power equipment tendering at
the end of 2012, with transformer orders up 38% YoY.
Aluminum is still the most oversupplied, with more new
supply from Xinjiang. Our top pick is Jiangxi Copper.
Gold – looking for growth: Our global commodity
team has lowered its gold price forecast for 2013 by 4%
to US1,770/oz but raised its long-term price by 11% to
US1,348/oz. We believe Zijin will provide higher volume
growth in the next few years from new mines, while
Zijinshan maintains flat production. Zhaojin is still a
favorite with investors, with its higher correlation to the
gold price, but it is in a period of slower volume growth