Asia China
Resources
2 March 2009
China Metals & Mining
Margins bottoming out in
4Q08-1Q09
Julian Zhu
Research Analyst
(852) 2203 6207
julian.zhu@db.com
The worst seems to be behind us
We saw some encouraging developments in the Chinese metals and mining
sector during our trip to China last week: 1) raw-material/finished-product inventory
is back to its normal level; 2) product ASPs remain low, but are starting to stabilize;
3) margins are likely to expand for cement, while those for metals are back to
positive on lower input costs; and 4) government stimulus measures are starting
to translate into real demand for materials. We are increasingly convinced that
4Q08-1Q09 will be the margins/earnings trough of this cycle.
Deutsche Bank AG/Hong Kong
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche
Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research
is available to customers of DBSI in the United States at no cost. Customers can access IR at
http://gm.db.com/IndependentResearch or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE
LOCATED IN APPENDIX 1.
Forecast change
Top picks
China Building Materials (3323.HK),HKD9.00 Buy
Zijin Group. (2899.HK),HKD4.17 Buy
Global Markets Research Company
Cement demand/prices to recover from 2Q09
Our meetings last week across China confirmed our belief that the construction of
infrastructure projects has started to come into play and translated into real demand
for materials, particularly cement. We now expect cement prices to decline 5% yoy
in FY09 and then rise 5% yoy in FY10 (from previous flat cement price in FY10).We
lifted our TPs for CNBM and Conch Cement on higher earnings. We reiterate Buy on
CNBM and upgrade Conch Cement to Buy from Sell. As a pure and low-cost cement
play, we expect Conch to benefit more from any rebound in cement prices.
Metals: FY09E not great, but strong recovery in FY10E
The market seems to have been so focused on lower metals prices that it has
overlooked another equally important margin-driver: input costs. After the significant
drop in raw materials and energy prices, we expect Chinese metals players to realize
cycle average margins in FY09, and then for margins to rise in FY10 on the steady
recovery of metals prices. We have lifted our target prices for Zijin and Chalco on
higher earnings forecasts. We reiterate Buy on Zijin and upgrade Chalco to Hold.
We still prefer cement to metals
With much higher leverage than metals to infrastructure construction, cement
looks set to enjoy the biggest and most direct benefits from the ongoing
infrastructure-related government spending. Even assuming no near-term growth
recovery in China, we still expect cement to fare better as the government will
likely spend more to revive the economy.
March-April likely a good entry point
Despite our view that the worst is behind us, we expect further downward pressure
on share prices when companies report FY08/1Q09 results in March/April. We
would start to buy CNBM, Conch and Zijin Mining into any weakness.
TPs based on DCF/residual income model; ASPs/production costs are risks
We use a residual income model to derive target prices for CNBM, Conch Cement
and Chalco. We are using cycle-average book value and ROE to capture through-thecycle
earnings growth dynamics. We use DCF to derive the target price for Zijin. Our
discount rate is based on a company-specific WACC. The key earnings drivers for
Chinese cement metals and mining companies are the sales prices of their
respective metals and mining products and their production cots. Any substantial
changes to either ASPs or production costs would significantly change our earnings
estimates and valuations on the stocks. This report changes ratings, price targets,
and/or estimates for several companies under coverage. For a detailed listing
of these changes, see table 7..

Table of Contents
What has changed? ........................................................................... 3
Earnings/TP/ratings changes ........................................................... 8
Cement: recovery in sight............................................................... 10
Metals: signs of stabilization.......................................................... 12
China Building Materials................................................................. 15
Anhui Conch Cement ...................................................................... 22
Zijin Group. ...................................................................................... 29
Chalco............................................................................................... 34
Appendix A: Infrastructure projects............................................... 40