The surprises in the results – the good and the bad: On average, 3Q09
earnings fell 29% YoY for the quarter, yet showing strong sequential
improvement of 65% QoQ. Surprises were more company specific than the
sector. Positive surprises came from Baosteel, Shenhua and Anhui Conch,
whose FY09E results are likely to exceed the consensus in our estimates.
The negative surprises were from Angang, with lower-than-expected and
below-peers sequential margin expansion for the quarter, and Jiangxi
Copper, which delivered a 64% QoQ decline in earnings while copper prices
hiked 20% for the period.
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As Chinese materials demand is likely to decelerate, we remain
selective: We expect continued positive growth in Chinese materials
demand in the coming quarters, but likely with deceleration. From the
risk/reward prospective, we like “cheap” commodities such as Chinese steel
and aluminium, with current spot prices sitting close to industry cash cost.
We are neutral-to-positive on thermal coal and believe it is becoming a
“defensive” sector again, as the cyclical part of the driver for power demand
– basic materials productions – has stabilised, and improving real demand of
power (ex-materials) would lead to moderate upside risks on coal prices.
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Top picks: We downgrade Angang from Outperform to NEUTRAL, with a
target price of HK$16 (from HK$19.5), to reflect the lower-than-expected
margin expansion and therefore lower unit EBITDA base for its valuation.
We revise up Yanzhou’s target price to HK$15 (from HK$13), to reflect the
impact of the highly probable Felix acquisition; maintain OUTPERFORM.
Our top picks for the sector are Baosteel, Shenhua, Shanshui and Yanzhou.