Demand robust on strong property market & FAI
􀅜 Economic recovery in China has pulled the steel, cement and petrochemicals sectors out
of the doldrums. In 1H09, strong fixed-asset investment (FAI) and the real estate market
were the main growth drivers of the construction materials sector. With real interest
rates falling and housing inventories low, housing starts are picking up. China is also
investing heavily in public infrastructure to sustain economic growth.
􀅜 In China, steel sector recovery is driven by real demand. In Europe and the US, real steel
demand will increase over the next few months as steel inventories are low and leading
indicators point to market recovery. We forecast steel prices in China will consolidate
with some volatility, then start to rise no later than late 4Q09.
􀅜 On the back of continued FAI and the robust real estate market, we forecast cement
demand in China will grow 19% and 11% in 2009 and 2010, respectively. We expect
demand in Taiwan will accelerate in 2H09, stimulated by big public infrastructure projects.
􀅜 Demand for PVC, organic silicon and sodium carbonate will rise on increased
construction projects in China. As PVC is in oversupply, integrated companies will
outperform. Chemicals makers with greater organic silicon and sodium carbonate
exposure will lead in earnings growth as they benefit more from market recovery.
􀅜 The steel, cement and petrochemicals sectors will continue to recover as construction
projects increase and infrastructure spending kicks in in China, and as the Europe and
US economies recover. Our top construction materials picks are: China Steel (2002.TW)
and Tong Ho Steel (2006.TW) on earnings growth in 2H09; Taigang Stainless Steel
(000825.SZ) on material cost advantages; Taiwan Cement (1101.TW) on growth of
China earnings; Asia Cement (1102.TW), Jidong Cement (000401.SZ) and Formosa
Plastics (1301.TW), which are integrated companies; and Xinan Chemical (600596.SS)
on China construction sector recovery.