120730_50591_China Metals and Mining_F:Normal Cover 2011 7/30/2012 4:11 PM Page 1 Natural Resources & Energy China Equity July 2012 Simon Francis* Metals & Mining Head of Metals & Mining Research, Asia Pacific The Hongkong and Shanghai Banking Corporation Limited +852 2996 6620 [email protected] Simon Francis joined HSBC as Regional Sector Head of Metals & Mining in March 2012. He is a Chartered Accountant (UK ACA) with Metals & Mining a degree in mathematics from the University of London. Simon’s equity research experience in Asia spans almost 20 years, virtually all of it covering the Metals & Mining sector. He has lived in various countries in Asia and worked for various financial institutions. From 2003 to 2012, he was regional sector head at prominent securities firms in Hong Kong, achieving significant recognition in the Greenwich Asia, Greenwich Europe, and Greenwich US surveys. Back to reality – launching coverage in China, Taiwan and Mongolia Thomas Zhu* Analyst, Metals & Mining, Asia Pacific The Hongkong and Shanghai Banking Corporation Limited +852 2822 4325 [email protected] Thomas Zhu joined HSBC in March 2012 as Metals & Mining Analyst for the Asia-Pacific region. He holds a Master’s degree in Business from Tsinghua University, Beijing. Following completion of a rigorous graduate training programme at a global investment bank, Thomas worked with Simon Francis as a metals analyst from 2009 to 2012. Chris Chen* Analyst, Metals & Mining, Asia Pacific The Hongkong and Shanghai Banking Corporation Limited +852 2822 4277 China Equity [email protected] We forecast a return to normalized demand growth and prices. Commodities markets are not Chris Chen holds a first class honours degree in accounting and finance from the Hong Kong University of Science & Technology. tight enough to drive up prices, though downside risks are largely cost-curve limited. We Before joining HSBC’s Metals & Mining team as Associate Analyst in 2012, she worked for a global assurance, tax and advisory services firm as an audit associate and with Simon Francis as a research associate. believe China is roughly a decade away from peak consumption levels Amit Pansari, CFA* Analyst Stock valuations are at trough levels. Commodities prices should recover somewhat in 2H12 HSBC Bank plc +91 80 3001 3760 although risks to demand remain. We see the investment opportunities as being poor in steel [email protected] and aluminium, better in copper, thermal and metallurgical coal, and good in gold Amit Pansari joined HSBC in June 2007 as a part of the Metals & Mining Research team. Prior to joining HSBC, he worked as a research analyst with a global analytical company and as a business analyst with an Indian fast-moving consumer good company. Amit is a Chartered Accountant and a CFA charter holder. We initiate/resume coverage of 14 stocks. Our top picks are China Shenhua, Mongolian Mining, Zijin Mining, Shougang Fushan Resources and China Metal Recycling *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations. By Simon Francis and team July 2012 July Disclosures and Disclaimer This report must be read with the disclosures and analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it Natural Resources & Energy China Equity abc July 2012 Summary We launch coverage of 14 stocks in the China, Mongolia and Taiwan metals and mining space. We argue that commodities markets are entering a period of slower yet more sustainable demand growth driven by industrialization and urbanization. We believe that the drivers of the last upcycle – loose Chinese monetary policy, increasing Western debt, and China’s fiscal stimulus in 2009 – are simply not prevalent today and that the incredible growth rates of 2003-11, are thus a thing of the past. China remains a decade away from peak consumption levels in our view. For much of the past decade or more, China’s development has been focused on the coastal areas. Substantial parts of central and western China remain relatively undeveloped; urbanization levels are still quite low overall. With slower growth, we think the supply-side will more easily be able to keep up with demand. As a result, the chances of extraordinary price outcomes – as seen in the last cycle – are less likely. Commodities prices have been a key driver of share price performance since 2003 and more benign prices may make investing in the sector trickier. Yet, even in an environment of ‘normalized’ prices some companies will make healthy margins through the cycle. Overall, our approach is neither ‘risk on’ nor ‘risk off’. We simply look for fundamentally sound companies with good earnings prospects driven by stronger prices, industry structural changes or volume growth or stocks that are simply undervalued. Our top picks are China Shenhua, Mongolian Mining, Zijin Mining, Shougang Fushan Resources and China Metal Recycling. To vote for HSBC in Asiamoney 2012 – www.asiamoney.com/survey/takesurvey/en/BP12/ Click here for more information on HSBC’s HK/China Research Team 1 Natural Resources & Energy China Equity abc July 2012 This page has been left blank intentionally. 2 Natural Resources & Energy China Equity abc July 2012 Contents Ratings and valuations 8 Company profiles 85 Aluminum Corp of China (Chalco) (2600 HK) 87 A return to normalised growth, Angang Steel (347 HK) 103 and prices 17 Baoshan Iron & Steel (600019 CH) 115 China economic outlook 30 China Coal Energy (1898 HK) 127 China Metal Recycling (773 HK) 141 Aluminium – structural oversupply to persist 33 China Shenhua Energy (1088 HK) 153 China Steel Corp (2002 TT) 167 Copper – fundamentally fine 42 Jiangxi Copper (358 HK) 179 Gold – higher in a time of Maanshan Iron & Steel (323 HK) 195 crisis 47 Mongolian Mining Corp (975 HK) 207 Steel – likely to stay tough out Shougang Fushan Resources (639 HK) 219 there 55 Yanzhou Coal (1171 HK) 229 Zhaojin Mining (1818 HK) 247 Metallurgical coal – supply side issues abating 67 Zijin Mining (2899 HK) 261 Thermal coal – taking the heat Disclosure appendix 274 out of the market 74 Disclaimer 277 3 Natural Resources & Energy China Equity abc July 2012 HSBC Metals & Mining sector valuation summary Bloomberg HSBC Mkt cap Target Current Potential __________PE ___________ _______EV/EBITDA_______ _____ PB ______ code rating USDbn price price return* 2011 2012e 2013e 2011 2012e 2013e 2011 2012e Coal China Coal Energy 1898 HK N(V) 14.1 7.48 6.48 19% 7.2 8.2 7.7 3.6 4.0 3.6 0.9 0.8 China Shenhua 1088 HK OW 67.9 34.00 27.15 29% 9.7 9.8 9.4 5.2 5.3 4.9 2.0 1.8 Shougang Fushan 639 HK OW(V) 1.3 3.00 1.97 61% 4.7 4.9 4.9 1.6 1.4 1.1 0.6 0.5 Mongolia Mining 975 HK OW(V) 1.9 7.15 4.03 77% 16.2 10.0 6.5 13.6 8.0 5.5 2.5 2.0 Yanzhou Coal 1171 HK N(V) 11.4 12.80 11.10 19% 5.0 7.7 7.8 3.9 5.5 5.5 1.1 1.0 Steel Angang Steel 347 HK N(V) 4.0 4.14 3.49 19% n.a. n.a. 21.7 10.1 8.6 5.7 0.4 0.4 Baoshan 600019 CH N 11.3 4.50 4.11 15% 9.8 7.3 11.1 5.4 4.0 5.0 0.7 0.6 CH Metal Recycling 773 HK OW(V) 0.8 12.25 5.58 125% 3.4 3.5 3.1 4.8 4.2 3.2 1.0 0.8 China Steel 2002 TT UW 13.2 24.75 26.50 -2% 20.3 42.9 25.3 13.7 20.5 16.0 1.4 1.6 Maanshan I&S 323 HK N(V) 2.2 1.75 1.49 17% 135.8 n.a. 12.8 5.0 6.5 4.5 0.4 0.4 Non-ferrous metals Chalco 2600 HK UW(V) 10.6 2.50 3.04 -18% 142.3 n.a. 84.2 10.6 15.1 10.3 0.7 0.7 Jiangxi Copper 358 HK N(V) 10.0 19.40 16.50 20% 7.1 7.3 8.1 5.9 5.2 4.2 1.2 1.1 Gold Zhaojin Mining 1818 HK OW(V) 3.3 14.30 8.82 66% 12.7 10.2 9.6 8.1 6.9 6.2 3.2 2.7 Zijin Mining 2899 HK OW(V) 10.9 3.70 2.29 66% 7.2 6.8 6.4 4.1 4.1 3.7 1.6 1.4 *Potential return equals the percentage difference between the current share price and the target price, plus the forecast dividend yield. Source: Bloomberg, HSBC Note: Priced as of 25 July 2012 HSBC Metals & Mining key financials summary Bloomberg ___ Revenue growth __ ____EBITDA margin ____ ____ EPS growth ___ _______ RoE _______ __ Net debt to equity__ Div code yield 2012e 2013e 2014e 2012e 2013e 2014e 2012e 2013e 2014e 2012e 2013e 2014e 2012e 2013e 2014e 2012e Coal China Coal Energy 1898 HK 5% 9% 6% 20% 20% 20% -12% 6% 3% 10% 10% 10% 5% 2% -3% 4% China Shenhua 1088 HK 17% 6% 6% 36% 35% 36% 0% 4% 9% 19% 18% 17% 7% 2% -3% 4% Shougang Fushan 639 HK -5% 4% -2% 51% 49% 47% -6% 2% -7% 11% 10% 9% -25% -28% -30% 9% Mongolia Mining 975 HK 91% 36% 10% 29% 32% 36% 62% 53% 22% 22% 27% 25% 50% 44% 38% 0% Yanzhou Coal 1171 HK 8% 6% 9% 23% 23% 24% -35% 0% 19% 13% 12% 13% 44% 46% 38% 3% Steel Angang Steel 347 HK -4% 6% -2% 7% 9% 11% nm nm 132% -3% 2% 4% 58% 52% 43% 0% Baoshan 600019 CH -12% 0% 1% 14% 10% 12% 35% -35% 40% 9% 6% 8% 32% 25% 14% 6% CH Metal Recycling 773 HK 6% 6% 17% 4% 4% 4% -3% 12% 16% 25% 23% 23% 40% 21% 13% 6% China Steel 2002 TT -8% 6% 1% 12% 14% 17% -53% 70% 20% 3% 6% 7% 54% 52% 45% 5% Maanshan I&S 323 HK -1% 7% -2% 5% 7% 8% -633% nm 93% -1% 3% 5% 73% 67% 59% 0% Non-ferrous metals Chalco 2600 HK 7% 6% 3% 5% 6% 6% -878% nm 104% -4% 1% 2% 133% 133% 132% 0% Jiangxi Copper 358 HK -3% -16% 5% 8% 10% 10% -2% -10% 14% 15% 12% 13% 0% -16% -24% 2% Gold Zhaojin Mining 1818 HK 30% 11% 12% 46% 45% 43% 25% 6% 10% 28% 25% 24% 30% 15% 0% 3% Zijin Mining 2899 HK 16% 2% 7% 24% 26% 27% 6% 7% 16% 22% 21% 21% 14% 8% -4% 4% Source: Company data, HSBC estimates 4 Natural Resources & Energy China Equity abc July 2012 Share price performance (priced at close of 25 July) Bloomberg Current 52-week 52-week __________ Absolute performance__________ __________ Relative performance__________ code price low high 1W 1M 3M 1 YR 1W 1M 3M 1 YR Coal