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1、Global ResearchChina Basic MaterialsRisk/reward skew less clear-cutAdjust ratings of basic materials equities to reflect less attractive risk/rewardWe believe the risk/reward for most basic materials stocks has become less attractive after rallying more than 30% YTD and over 100% LTM. Recent positiv
2、e catalysts (including strong demand/price recoveries ex-China and production curtailments in China triggered by carbon-neutral ambitions) are well played out. We fail to envision the next positive catalysts that could stretch valuations further. As a result, we turn more cautious on stocks with the
3、 highest direct exposure to commodity prices: Jiangxi Copper (from Buy to Sell), and Chalco (from Buy to Sell). We also downgrade Shenhua from Buy to Neutral on the back of lackluster earnings growth. Our top picks are companies with good volume growth such as Zijin or still with mismatches for valu
4、ations/fundamentals, such as China Hongqiao and Angang.14 May 2021EquitiesChinaBasic MaterialsJames KanAnalystjames.kan+852-2971 6334Arthur LuAssociateS1460120080002arthur.lu+86-21-3866 8802Beili WangAssociate Analystbeili.wang+852-2971 7812We fail to observe additional strong catalystsWe believe ex
5、-China post-pandemic restocking is happening and should be well observed by global investors, given ex-China materials prices are generally much higher than prices in China. While Chinas decarbonization will restrict additional capacity, it is likely to be implemented phase by phase so as to avoid e
6、xcessively high commodity prices, which would affect downstream manufacturing profitability. As these two key catalysts unfold, we fail to find other strong catalysts to support the sectors continued strong performance. UBS global metals & mining team also expects 2021 to be top of the cycle rather
7、than the start of a super-cycle (link).Fundamentals in China are steady, but liquidity uncertainty remainsOur recent virtual China trip (link) reconfirmed generally, demand in China should be steady. Infrastructure demand should be resilient as local government bonds issuance and deficit ratio have
8、only declined slightly. Property new starts could decline slightly (3%) due to strong property sales in certain cities and low property inventory. Auto/manufacturing should continue to recover. Nevertheless, slower credit growth in China will limit speculative commodity investments and valuation mul
9、tiple expansions.Upgrade earnings but adjust ratingsFactoring in Q121 results, we increase our 2021 earnings estimates for most companies (Fig.22/24/27/29). Overall, we adjust our ratings for steel, coal, copper, and aluminium companies from 15 Buys and one Neutral, to nine Buys, four Neutrals and t
10、hree Sells (Fig.1). We derive our PTs from P/BV versus ROE or DCF methodologies. Our top Buy-rated stocks remain Zijin, Hongqiao and Angang.Figure 1: Rating and price target changesWenzhuo DuAnalystwenzhuo.du+852-3712 2545David WeiAnalystS1460519080001david.wei+86-21-3866 8842Xinlei LiAssociateS1460
11、120120005xinlei.li+86-21-3866 8805TickerRatingPrice Target (LC)PT changesTickerRatingPrice Target (LC)PT changesNewOldNewOldNewOldNewOldChina Oriental0581.HKBuyBuy3.203.065%Baosteel600019.SSBuyNeutral10.906.5068%Angang0347.HKBuyBuy8.104.2591%Angang000898.SZBuyBuy6.094.0052%Maanshan0323.HKBuyBuy4.822
12、.7079%Maanshan600808.SSNeutralBuy4.403.1042%Yanzhou Coal1171.HKBuyBuy11.509.7019%Shaanxi Coal601225.SSNeutralBuy12.6011.0015%Shenhua1088.HKNeutralBuy17.5017.500%Shenhua601088.SSNeutralBuy21.0021.000%Zijin2899.HKBuyBuy14.0012.5012%Zijin601899.SSBuyBuy14.2013.604%JCC0358.HKSellBuy17.8016.607%China Hon
13、gqiao1378.HKBuyBuy16.5010.0065%Chalco2600.HKSellBuy4.503.6623%Chalco601600.SSSellBuy5.405.331%Source: UBS estimatesThis report has been prepared by UBS Securities Asia Limited. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES, including information on the Quantitative Research Review published by UBS,
14、 begin on page 54. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in
15、 making their investment decision.China and ex-China steel priceApr-21moremoremoreChina Basic Material SectorUBS Research THESIS MAPMOST FAVOREDLEAST FAVOREDZijin, Hongqiao, AngangJCC, Chalco/Chalco-APIVOTAL QUESTIONSQ: Will fundamentals and sentiment continue to support commodity prices during 2021
16、?Yes, we expect commodity prices to remain high but with limited upside. Amid the ongoing recoverygiven vaccinations and a steady Chinese economy, we expect commodity prices to remain elevated.But we do not think there is a commodity super-cycle to boost commodity prices further fromcurrently high l
17、evels. Sentiment might also be affected by Chinese/global central banks liquiditytapering efforts. However, we fail to find other catalysts to support strong performance.Q: Which materials subsectors are likely to outperform?We prefer steel and aluminium among basic materials subsectors. We believe
18、the steel sector willcontinue to outperform as the market gap between China and ex-China remains large, and we likealuminium because it is both geared to capacity control and high growth. We expect the momentumof coal prices to continue, but we need to be selective as cost inflation and supply contr
19、ol are hurtingcoal miners profitability.UBS VIEWTop of the cycle not the start of a super-cycle; upgrade earnings but adjust ratings. As globalrestocking and Chinas decarbonization unfolds, we fail to determine any new strong catalysts thatcould boost commodity prices further. As commodity prices ap
20、proach their historical highs, we raiseour earnings estimates for covered companies (except copper equities due to a lower gold price) andadjust our ratings accordingly.EVIDENCEWe believe ex-China post pandemic restocking is happening and should be well observed by globalinvestors, given that ex-Chi
21、na materials prices are generally higher than prices in China. Chinasdecarbonization is being implemented phase by phase. As these two catalysts unfold, we see no otherstrong catalysts to boost commodity prices. However, demand in China remains strong, supportingelevated prices, and the recovery app
22、ears to be on track, evident in resilient infrastructure demand,strong property sales and low property inventory, as well as manufacturings strong growth.WHATS PRICED IN?We believe current commodity prices already reflect the ongoing global restocking and the initialstages of Chinas decarbonization,
23、 as all commodity prices approach their historical highs and ex-Chinaprices are stronger than prices in China. On valuations, most commodities stocks are trading abovetheir long-run average P/BVs or even one or two standard deviations (SD) higher. We expect upside to come from the companies internal
24、 growth potential, the commodity-specific peak seasons, and possible further supply restrictions.(US$/tonne)HRC - China domesticHRC - N. Europe domesticHRC - US domestic1,6001,4001,2001,000800600400200Source:10-Apr10-Oct11-Apr11-Oct12-Apr12-Oct13-Apr13-Oct14-Apr14-Oct15-Apr15-Oct16-Apr16-Oct17-Apr17
25、-Oct18-Apr18-Oct19-Apr19-Oct20-Apr20-OctPlattsChina Basic Materials14 May 20212China Basic MaterialsPIVOTAL QUESTIONSQ: Will fundamentals and sentiment continue to support commodity prices during 2021?UBS VIEWYes, we believe commodity prices will remain elevated amid the ongoing global recovery give
26、n vaccinations and a steady Chinese economy. However, we do not believe there is a commodity super-cycle to boost commodity prices further from current highs. Sentiment might also be affected by Chinese/global central banks liquidity tapering efforts.EVIDENCEProperty sales in China increased by 63.8
27、% YoY in Q121; 20.7% higher than Q119s level. Sales strength is driving pipeline inventory to decline further. Credit growth slowed to 12.3% YoY in March 2021; we expect 11% credit growth for full-year 2021. Manufacturing investments grew by 25% YoY in March, along with 30% growth in exports. Meanwh
28、ile, copper, aluminium, steel, and coal prices are all at decade highs.WHATS PRICED IN?We believe Chinas post-COVID recovery is already factored into current commodity prices. As the overseas recovery is still ongoing, we believe decade-high commodity prices indicate ex-China restocking is largely p
29、riced in as well. Meanwhile, we also believe the impact of production restrictions on steel and aluminium is partially factored in.Super-cycle or top of the cycle?As shown in Figure 3 to Figure 6, the ex-China steel price is currently almost double the steel price in China, while LME copper price is
30、 about US$180 higher than the China SHFE copper price (excl. VAT). We believe ex-China post pandemic restocking is happening and should be well observed by global investors, given that ex-China basic materials prices are generally much higher than prices in China. While Chinas decarbonization will i
31、ndeed restrict further capacity additions, we believe there will be a trajectory of implementation to avoid excessively high commodity prices, which would negatively affect downstream manufacturing profitability. As these two key catalysts unfold, we fail to find other strong catalysts that would co
32、ntinue to support the sectors strong performance. UBSs global basic materials team also expects slower growth for Chinese demand and post-COVID supply resumptions should result in 2021 being the top of the cycle rather than the start of a super-cycle (link).UBS Researchreturn China Basic Materials14
33、 May 20213Figure 2: Steel price, US$/t(US$/tonne)HRC - China domesticHRC - N. Europe domestic1,600HRC - US domestic1,4001,2001,000800600400200Apr-21 Oct-20 Apr-20 Oct-19 Apr-19 Oct-18 Apr-18 Oct-17 Apr-17 Oct-16 Apr-16 Oct-15 Apr-15 Oct-14 Apr-14 Oct-13 Apr-13 Oct-12 Apr-12 Oct-11 Apr-11 Oct-10 Apr-
34、10Source: PlattsFigure 4: Aluminium price, US$/t2,7002,5002,3002,1001,9001,7001,5001,300Apr-15Apr-16Apr-17Apr-18Apr-19Apr-20Apr-21SHFELMESource: WindFigure 3: Copper price, US$/t10,5009006008,5003006,500-(300)4,500(600)2,500(900)Jan-08Jan-09Jan-10Jan-11Jan-12Jan-13Jan-14Jan-15Jan-16Jan-17Jan-18Jan-1
35、9Jan-20Jan-21SHFE over LME Spread (RHS)SHFE (excl. VAT)LMESource: Wind, SMMFigure 5: QHD 5500 price, RMB/tRMB/t900800700600500400300Apr-21 Oct-20 Apr-20 Oct-19 Apr-19 Oct-18 Apr-18 Oct-17 Apr-17 Oct-16 Apr-16 Oct-15 Apr-15 Oct-14 Apr-14 Oct-13 Apr-13 Oct-12 Apr-12 Oct-11 Apr-11 Oct-10 Apr-10Source:
36、SxcoalTight supply drives the price rally after Chinese New YearGuided by the Chinese governments carbon peaking/neutral target, high-carbon-emission/energy-intensive sectors, such as steel and aluminium, recently announced a series of supply-side control policies in Q121. Meanwhile, several coal mi
37、ne accidents happened in Shanxi and Xinjiang, leading to a new round of nationwide production safety inspections. We believe the curtailment policies/inspections (some of them are summarized in Figure 7) should tighten the demand/supply structures of the steel/coal/aluminium sectors.1) Production cu
38、rtailment should lower crude steel production in 2021E. We expect the production curtailment in Hebei to reduce 2021 crude steel production by c30-40mt. However, the currently high profitability of steel products should incentivize production outside Hebei Province. Also, we expect the utilization r
39、ate of electric arc furnaces (EAFs), due to their low emission nature, to rise to meet the supply gap.China Basic Materials14 May 202142) Aluminium capacity ramp-up may slow down amid tighter control of energy-intensive industries. Inner Mongolias local government announced a halt to new aluminium c
40、apacity approvals after failing to meet the energy saving target during the 13th Five-Year Plan (FYP) period. According to Aladdinys estimate, the capacity controls could limit the 2021 incremental capacity below 2mt, and also slow down the speed of capacity ramp-up. Based on the fact that most capa
41、city now being delayed to H221, we believe the supply/demand in the aluminium market may remain tight.Figure 6: Aluminium new capacity has been delayed to H221New capacity: kt8006004002000Q1Q2Q3Q4Forecast in Jan. 2021Forecast in Apr. 2021Source: Aladdiny3) Production inspections bring downside risk
42、to coal production. The frequent coal mine accidents in Shanxi, Guizhou, and Xinjiang have alerted local governments to production safety. We expect the supply-side disruptions caused by mine accidents and the subsequent safety inspections should restrict coal supplies in the short term, although th
43、e supply shortages may be relieved in the longer term as the government has urged miners to increase production before the peak season.China Basic Materials14 May 20215Figure 7: Recent curtailment production excerptsSectorRegionAnnouncementEffective periodPoliciesdate3/20/2021-7 companies to reduce production by 50% from 20 March to 30 June,Tangshan3/19/2021then 30% till year-end; the remaining 16 companies to reduce 30%12/31/2021from 20 March till year-end