Channel checks on construction demand; Buy CNBM, Neutral JXC
Positive surprises from our construction demand channel checks
We visited three cities (Changsha, Guangzhou, and Wuhan), and met with
property developers/agents, government officials, and our commodity-related
contacts (copper transformer/wire producers and cement producers).
Demand from property could re-accelerate, main upside surprises:
(1) First two weeks’ sales in March imply double-digit mom volume growth, after
30%-40% mom growth in Feb.
(2) Main reasons for the volume strength, as per most developers, are the 20%-
40% lower prices from peak, lower interest rates, and local government stimulus.
For example, Changsha city is giving a cash subsidy of Rmb80K/unit for qualified
buyers, effectively lowering the purchase price by about 20%.
(3) More importantly, a common feature for some 4Q08 delayed projects is their
revival, a key positive for construction demand.
Infrastructure spending could pick up further in 2Q-3Q:
(1) Local governments are speeding up infrastructure projects such as doubling
work shifts. Central China cement production in Jan-Feb is up 20% yoy (Digital
Cement), vs. Jan-Feb ‘08 of -3% yoy. New highway and railway projects could get
kick started in late 2Q in central China based on our meetings with local contacts.
(2) The PHC pile plant (for ground work construction) is unable to handle current
strong orders, vs. a 50% operating rate in 4Q, a leading indicator by 3-6 months.
(3) Our copper transformer contacts indicate a first sequential pickup in shipment
from Jan-Feb, as property and infrastructure orders pick up.
Construction demand key 2Q theme, upgrade CNBM, Buy Chalco
We believe we are in a period between the end of the winter construction
slowdown and before 2Q acceleration. Our Feb channel checks indicate a pick up
in infrastructure spending (50% of construction demand). If property demand, the
other 50%, re-accelerates, we believe the key beneficiaries would be:
(1) Cement, which has pure construction exposure; it could enjoy the rise in both
1st derivative (high utilization rate) and 2nd derivative (growth acceleration). On
this basis, we upgrade CNBM (12-m TP of HK$14.4) to Buy from Neutral.
(2) Aluminum, 35% property and 16% power grid exposure; it could benefit the
most from 2nd derivative pickup. We rate Chalco Buy (on Conviction List).
(3) Copper, 30% property and 24% power exposure; it is also a 1st derivative (tight
global supply) and 2nd derivative play (China demand pickup). We upgrade JXC H
(12-m TP of HK$8.5)/ JXC A (12-m TP of Rmb20) to Neutral from Sell.
We raise JXC and cement 2009-2010E earnings by 12%-59%. Key risk to our
target price and view: sharper-than-expected global slowdown.

Table of contents
Overview: Another round of channel checks; more positive on construction demand 2
Property channel checks indicate positive surprise 7
Infrastructure channel checks: Further positive signs 12
3 criteria to leverage from potential construction demand pickup 15
Cement: Both 1st and 2nd derivative play 18
Aluminum: Good 2nd derivative play, reiterate Conv. Buy on Chalco 26
Copper: Both 1st and 2nd derivative play, accumulate on weakness 30
Disclosures 39
The prices in the body of this report are based on the market close of March 20, 2009.