China: Metals & Mining
Twin demand engines revving up; raise sector stance to Attractive
Getting positive on Infrastructure and Property capex growth
We upgrade our sector stance to Attractive from Neutral as we believe
risk/reward remains favorable. Despite the sharp run-up this year in sector
stock prices, we believe we are still in the early stages of the infrastructure and
property cycles, and current valuations are still at a large discount to mid-cycle
levels, despite rebounding from their deep trough.
Infrastructure capex has surprised on the upside year to date, mainly due to
acceleration of existing projects. Our updated analysis of the Rmb4 tn stimulus
package shows there are many more new projects to come.
Property sales strength has started feeding through to capex. With 11% capex
growth in March, we believe January’s 5% growth marks the latest trough in
this cycle. We believe both these engines of growth have further to run.
Infrastructure stimulus reducing tail risk/boosting upside leverage
(1) New data points, from our channel checks, show infrastructure spending
growth is strong and becoming broader in scope.
(2) How much more is still to come? Our base case analysis quantifies the
impact at potential 8.5% additional 2009 cement demand and around 5% 2009
demand boost in steel, copper, and aluminum in China.
(3) The resulting demand boost could offset capex slowdowns of up to 26%
yoy in property and up to 27% in manufacturing in 2009. We raise 2009-10
demand assumptions 2-11 ppt for different commodities, & earnings 2%-50%.
(4) Our base case — assuming only 50% of the Rmb4 tn stimulus package is
new spending — is conservative and has upside risk. The latest government
announcement since the NPC indicates all Rmb4 tn could be new spending,
suggesting a bull case of demand being boosted by double.
Property transaction volume rebound has begun feeding through to
capex, with 1Q property capex up 8% yoy.
Five themes for implementation, 11 rating upgrades
(1). 1st derivative vs. 2nd derivative, upgrade Jiangxi Copper and Hidili to
Buy from Neutral on supply tightness.
(2). Prefer domestic to global, upgrade three thermal coal stocks to Neutral.
(3). Prefer early cycle plays, upgrade Chalco to Buy (CL)
(4). Prefer higher leverage plays, reiterate Buy on CNBM.
(5). Valuation upside/downside: Despite near-term pullback pressure after
sharp run-up, names still trading close to trough offer better risk/reward.
Key risk: sharper-than-expected global slowdown.

Table of contents
Overview: Twin demand engines revving up 2
Infrastructure cycle: Early stage of upcycle 12
Property upcycle in early stage, overall growth upgraded 22
Theme #1: Prefer 1st derivative plays: Copper/coking coal 29
Theme #2: Prefer domestic commodities over global: Cement/coal 36
Theme #3: Prefer early cycle plays: Aluminum; upgrade Chalco to Buy 41
Theme #4: Prefer higher leverage plays, reiterate CNBM Buy rating 46
Theme #5: Prefer attractive valuation upside/downside plays: Magang 48
Risks: Policy tightening or OECD unexpected sharp macro drop 57
Base metal equities summary financials 59
Coal equities summary financials 61
Steel equities summary financials 65
Cement equities summary financials 69
Disclosures 77
The prices in the body of this report are based on the market close of May 6, 2009.
Overview: Twin