Mixed demand readings expected; we see opportunities
The sector has pulled back 8% from recent May highs on profit taking and
mixed demand readings, such as weak power consumption and potential
PMI contraction. We continue to see buying opportunities emerging as
valuation drops below mid cycle levels, while the cyclical recovery remains
underpinned by six drivers. We maintain an attractive sector stance.
Six drivers to sustain cycle recovery; fresh data points/analysis
(1) Credit expansion strength, the key leading indicator for commodity
prices, could be easily maintained with average monthly new loan growth
of Rmb490 bn, well below the ytd monthly average of Rmb1,300 bn.
(2) From a value chain perspective, strength is now seen in segments
close to end demand, but has not even reached midstream areas such as
steel and aluminum. Further upstream, coal trader feedback on power
demand is even more bearish.
(3) Even end demand recoveries are still in early stages
-- Property developers have started buying land, new projects could follow.
-- 2009 ytd new infrastructure project starts are still up less than 50% yoy,
as issues relating to land, funding and management take time to resolve.
(4) Previous cycles have also shown that public leads private spending.
(5) Rel. to past cycles, Corporate China better positioned to boost capex.
(6) Geographically, inland areas need further infrastructure upgrades.
Stock picks: Focus on construction demand plays
(1) Chalco (2600.HK, Buy, CL): Key leverage to property (37% of demand),
trading at 95% ’10 EV/RPC, vs. mid cycle 130% and peak cycle 190%.
(2) CNBM (3323.HK, Buy): Cement name with 40% ’09 volume growth
trading at 113%/99% ’09/’10 EV/RPC, vs. mid cycle 120% and peak cycle
180%, attractive relative to Conch ‘09/’10 at 180%/161% respectively.
(3) Magang (0323.HK, Buy): 55% construction steel exposure with flat
steel operations normalizing from a low base. Construction steel price has
started breaking out on strong fundamentals. Trading at 1X/0.9X ‘09/’10
P/B, Magang is one of the most attractively valued stocks in our coverage.
Catalysts
Further signs of property upcycle (transaction volume, inventory, land
purchase), rising prices for construction-related commodities (eg. rebar,
cement, aluminum prices) feeding into mid stream power consumption.

Table of contents
Driver #1: Strength in credit expansion likely to be maintained 3
Driver #2: Cycle recovery is at an early stage of the value chain 6
Driver #3: Even for end-demand drivers, recovery is still in an early stage 9
Driver #4: Past cycle shows public spending leads private spending 14
Driver #5: Relative to past cycles, Corporate China is better positioned to lever up 16
Driver #6: Geographically, inland areas have a lot to catch up 17
Mid cycle correction; focus on construction demand plays 19
Valuation charts 31
Summary financials 37
Disclosures 40
The prices in the body of this report are based on the market close of May 26, 2009.