Base Metals Sector Phillip Securities (HK) Ltd

Seeking appropriate chance to Phillip Securities Research Ltd invest in 17 July 2012 Base Metals Sector Report type: Update Company Rating Price TP Upside M.Cap. (HK$) (HK$) (%) (HK$'bn)

Jiangxi Copper Buy 17.12 20.78 21.4% 81 Zhongw ang Accumulate 2.89 3.39 17.3% 16 China Hongqiao Buy 3.46 4.17 20.5% 20

A. Base metals prices kept fluctuating in 1H12 In 1H12, base metals prices kept fluctuating domestically and abroad, declining after early rise. With global easing liquidity in the first quarter, some metals like copper, nickel and tin had gone upwards nearly 10%. At the same time, aluminum, zinc and lead prices had seen a little change. Entering into April, the European debt crisis began worsening again, economic situation for Europe, the U.S. and emerging economies became weaker, then metals prices declined, but with a limited extent. Overall speaking, most metals only lost about 3% in 1H12, Source: Bloomberg, Phillip Securities among which tin price declined 7.5%, but copper price decreased less than 1%. Fig 1.Base metals prices trend in 1H12 Analyst Fan Guohe 120.0 [email protected] +8621 5169 9400 112.5

105.0

97.5 Copper Aluminum Lead Nickel Tin Zinc HSI Index 90.0 1-Jun-12 9-Mar-12 6-Apr-12 4-May-12 13-Jan-12 27-Jan-12 15-Jun-12 29-Jun-12 10-Feb-12 24-Feb-12 23-Mar-12 20-Apr-12 30-Dec-11 18-May-12

Sources ：Bloomberg, Phillip Securities

Meanwhile, influenced by the production limit in the 12th 5-yr plan for non-ferrous metals sector and sluggish downstream demand, the output growth of most metals had slowed down in the early five months. According to the State Statistics Bureau, copper production increased 8.36% y/y to 2,380.2 thousand tons, 5.84pcts less than 14.2% growth in 2011. Aluminum production increased 10.59% y/y to 7,820.4 thousand tons, 0.61pcts less than 2011. Lead production decreased 5.13% y/y to 1,609.4 thousand tons, 17.63pcts less than 2011. Zinc production decreased 6.93% y/y to 1,934.6 thousand tons, 10.73pcts less than 2011. Tin production decreased 7.23% y/y, 12.13pcts less than 2011. Nickel production increased 4.1% y/y to 105.9 thousand tons, 30.3pcts less than 2011.

Research analyst Fan Guohe [email protected] (8621) 51699400-110

MICA (P) 004/01/2011 Ref. No.: SG2011_0293 1 of 1 Minor Metals Sector Shanghai Equities Research 17 July 2012

Compared to the small 5.5% rise of HSI index, most of base To get out of the crisis, the US only adheres to printing money. metals manufacturers also experienced less than 10% change, Obviously, it is covering up the conflict with more money without in accordance to our previous expectation. Specially speaking, the care over the possibility that flooded liquidity will overflow the companies with scale or resource advantages performed into other economies and cause the inflation expectation and better, Jiangxi Copper (0358.HK) and social turmoil, which presents its irresponsible attitude. (2626.HK) both realized some rise. However, the outstanding performer in 2011, China Metal Recycling (0773.HK) lost nearly In contrast, the Europe also prints some money, but it has begun 30% because of the weak iron& steel sector. In addition, Daye attaching importance to structural economic problems. In past Nonferrous （0661.HK ）also plummeted 24%. two rounds of European Union Summit, the austerity budget Fig 2. Base metals stocks prices trend in 1H12 agreement and the unified banking regulation have been accomplished. Concretely speaking, recently Spain, Italy and 140 France have put forward a series of deficit cut plans. Therefore, 130 the measures by the Europe are controlled and to cultivate a 120 strong sense of discipline, which will resolve the structural 110 imbalance problem and the flooded liquidity by leverage.

100 However, the deficit cut plan hasn’t been agreed in the U.S.. Moreover, the savings ratio had temporarily risen up, but then 90 358 HK 661 HK 505 HK 2600 HK 2626 HK drop down to below 4% again, presenting the U.S. is still to cope 80 3833 HK 1021 HK 2889 HK 1208 HK 1378 HK 773 HK 976 HK 2133 HK with the crisis with the leverage and financial tools, which are in 70 fact the cause for 2008 financial crisis. Fig 3.Low savings rate in the U.S.(%) Jan-12 Jan-12 Apr-12 Apr-12 Jun-12 Jun-12 Jun-12 Mar-12 Mar-12 Dec-11 Feb-12 Feb-12 May-12 May-12 9 Sources ：Bloomberg, Phillip Securities 7 B. US dollar index won’t keep on strong move Since 2Q12, the U.S. has released stronger economic statics 5 data, and the European debt crisis spread to some core countries like Spain and Italy, which then triggered the worry 3 over systematic risk. Therefore, the USD index has rebounded from 78 to 83.5 around, and the USD/EUR has again depreciated to the low level about 1.2 in 2008 financial crisis and 1 2010 European debt crisis. Currently, the worry on the debt Jul-11 Jul-10 Jul-09 Jul-08 Jul-07 Jul-06 Jan-12 Apr-12 Jan-11 Apr-11 Jan-10 Apr-10 Jan-09 Apr-09 Jan-08 Apr-08 Jan-07 Apr-07 Oct-11 Oct-10 Oct-09 Oct-08 Oct-07 crisis has gotten more serious, the USD index shows strong Oct-06 technically, so many investors think the USD index has ended ten years depreciation trend since 2002, and will reverse from Sources ：Bloomberg, Phillip Securities now on. As the second largest economy and the largest developing However, we don’t think so. With the upsurge of emerging economy, China also has adjusted its developing module to economies, global diversification trend is strengthening. structural reform and economic growth mode change, but not Especially since global financial crisis in 2008, the trend simply depending on stimulus plans. In this regard, we think the becomes more obvious and is represented by the decline of the depreciation trend of the US dollar won’t change in medium to US. In our view, the absolute hegemony of the US over the long term if it continues the irresponsible behavior, which has world has ended, which will be followed by the relative been proved by less purchase for the US’s public debt by foreign hegemony of the US. holders. Fig 4. Declined proportion of the purchase for the The change in reality has been embodied in economic, political US’s public debt by foreign holders and military aspects of major countries. Furthermore, the Change of public debt change of comprehensive strength is spreading into the financial Change of public debt bought by foreign holders field. With the end of absolute hegemony of the US, global Change of public debt bought by FED financial system with the US dollar standard system at the core and the US’s controlling IMF, Word Bank and rating 150% organizations should also experience the reform, and the US dollar will be inevitably impinged. Therefore, we can see its 100% temporary rebound, but the long-term reversion is of little possibility. 50%

0% Regarding present strong move of the dollar, we think it is 1996-2000 2001-2007 2008 2009 2010 2011 a passive advance for the European debt crisis. -50% Meanwhile, it seems not to be persistent, because the Europe has taken more reasonable measures to answer Sources ：Bloomberg, Phillip Securities for the crisis. In reality, current global crisis is triggered by structural conflict and economic imbalance, and the capital is Looking forwards to 2H12, we believe the USD adequate. The market can’t temporarily guide money to suitable sectors or economies because of the shortage of effective tools. depreciation may keep on with a new round of quantitative

2 of 2 Minor Metals Sector Shanghai Equities Research 17 July 2012 easing policy. By now, Brazil, India and China have cut down the benchmark rates one by one, Europe and the Lastly, the time to bring out the QE3 or similar policies for the US South Korea have also taken same measures recently, becomes mature. In June, the Fed’s operation twist will come the UK has increased 50 billion pounds for its QE policy scale. due. Meanwhile, the plunge of crude oil price help the CPI of the In sum, global monetary system is moving on further easing US drop 0.3% MoM in May, realizing the first monthly drop in policies. Regarding the US, we think it is of high possibility that past two years, and the extent is even the biggest since it will carry forward a new round of QE policy in 2H12. December 2008, showing that the inflation pressure is small in the US. Moreover, the US dollar index has returned to the high 83 around, so it has gotten the space for future depreciation by First, the US’s economy is showing weak sign again. From the more easing policies. What’s more, recently many major most important employment data, the total nonfarm payrolls rose economies have loosened monetary policies, which can relieve merely by 80,000 jobs In June. Meanwhile, the unemployment the US’s political pressure. rate has kept at a high 8.2 percent. Overall speaking, the employment situation in 2Q12 was worse than 1Q12. The Fig 6. US dollar index stands at a relative high level average nonfarm payrolls had added 226 thousand jobs in 1Q12, 90 but only 75 thousand jobs in 2Q12. The employment data is the most important economic data and one of benchmarks to carry 86 forward new measures for the Fed. Fig 5. Weak employment situation in the US(% ，，， 82 thousand man ））） 78 12 600

400 74 10

200 70 8 0 Jan-12 Jan-11 Jan-10 Jan-09 Jan-08 Jan-07 Jan-06 Sep-11 Sep-10 Sep-09 Sep-08 Sep-07 Sep-06 May-12 May-11 May-10 May-09 May-08 May-07 May-06 6 -200 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 -400 Sources ：Bloomberg, Phillip Securities 4 -600 2 In general, we think it is of little possibility that the US -800 Nonfarm payrolls Unemployment rate-L dollar will continue the strong move. In contrast, it may 0 -1000 begin to devaluate again. Historically, the dollar has been highly negative with base metals prices trend. Considering ： Sources Bloomberg, Phillip Securities that easing monetary policy will unloosen the market liquidity, we think metals prices may perform stronger in Moreover, the real estate sector and the consumption impacting 2H12. significantly the US don’t show evident improvement. Furthermore, its previous relative strong economy depends much on lax fiscal policies like tax cut. However, the US C. Downstream demand may rebound economy will face the fiscal cliff. The combination of tax hikes From the viewpoint of global area distribution of metals demand, and spending cuts would take more than $500 billion out of the China, Europe and the U.S. normally contribute around 70%. economy in 2013 alone, which accounts for 3.8% of the GDP. Since 2011, the slow economy growth has brought about lacking downstream demand, so metals prices also have showed weak. Secondly, present Obama administration is facing the pressure However, we think aforehand and slight economic policies of 2012 Election, especially in 2H12. According to latest poll, the change and stimulus plans will let the demand bottom and percentage of votes obtained by Obama and Romney are both rebound. 47%, so current Obama administration faces heavy pressure. Fig 7. China, Europe and the U.S. consumed most of Therefore, the Fed may put forward some measures, because metals the president Bernanke also is a Democrat and has often called 100% attention to weak economy and the possibility of more stimulus 23.9% 32.6% 29.3% 30.0% plans. 80%

10.1% 15.7% 8.5% Thirdly, the debt is huge. As of late June, America’s public debt 60% 9.0% 17.1% has reached up to US$15.79 trillion so far, and the newly 19.9% 19.6% 20.3% annualized GDP is only US$15.21, so the debt to GDP ratio has 40% also broken through 100%. Moreover, the U.S. is also burdened 43.4% with US$119.33 trillion unfunded liabilities. Therefore, the U.S. is 20% 38.5% 41.1% 41.2% even facing more severe debt pressure than other economies. 0% Even in 2012, the European debt crisis has irritated the market, Copper Aluminum Lead Zinc it is still the US in the world that faces the largest debt to mature, China Europe USA Others about US$3 trillion. Plus with above $1 trillion fiscal deficit each year, we think the US’s debt is unsustainable, so it holds the ： motion to print more dollars to let the USD depreciate, which Sources Phillip Securities may bring about the debt monetization and stimulate the export, and then alleviate its debt burden and benefit the economy.

3 of 3 Minor Metals Sector Shanghai Equities Research 17 July 2012

Firstly, the control over real estate sector and structural is descending. What’s more, to ensure economic growth adjustment over past two years have refrained China’s is current core policy in short term, but the consistent investment considerably, whose demand for metals normally thread running policy is still the structural adjustment in takes above 40% in the world. China’s GDP growth reached the medium to long term. China has lowered the GDP growth low level of below 8% in 2Q12 for the first time in past three target to 7.5% for the first time, so the demand for base years. metals from high GDP growth will sag in future. However, presently China’s government policy has begun active change, and its economy situation is seeing the signs of rebound. D. Copper will lead the peer for the short supply Besides two rate reductions, recently Premier Wen Jiabao Bulk commodities like energy and metals were refrained stressed that stabilizing investment is the key to enlarge by US dollar rebound and weak downstream demand in domestic demand and ensure economic growth. From the angle, 1H12, but copper showed a strong resilience. Looking to support the growth and increase investment again become forwards, copper will still lead the peer. It is facing the the core policy guidelines, which can drive up the demand for supply problem like resource restrict, downgraded ore metals. grade, increased cost and the strikes. There are not large-

scale copper mines discovered or put into operation in the past Secondly, many main European countries have carried forward decade. Regarding potential projects to be carried out, large- austere budget measures to cope with the debt crisis. At the scale projects won’t be operated until 2013. In the coming years, same time, the governments also pay close attention to we will only see the operation of medium to small scale projects. economic growth and released EUR120 billion stimulus plan at What’s more, the copper grade of most copper minces in the end of June. Meanwhile, the president of the ECB also didn’t production has declined faster, with global copper grade of only exclude the possibility to continue to cut down interest rate in 0.73%, and high-grade copper production is below 50%. future. Some countries like Denmark even have adjusted the Furthermore, lower ore grade also let the rate of capacity deposit rate downwards to -0.2% and entered into negative rate utilization for global copper mines present a long-term declining period. All those proved the determination of the governments to trend. The rate has fallen from 94.7% in 2001 to 79.2% in 2011. reverse economic depression. Therefore, we don’t think Fig 9.Copper price showed a strong resilience in 1H12 European economy will worsen continually. There is still the （ ） recovery possibility. （（%）） 118 Thirdly, the manufacturing and the property industry have basically bottomed in the U.S. and maybe recover in 108 future. For example, benefitting from declined gasoline price, its new vehicle sales volume in June increased 22% 98 y/y, beating the market expectation considerably, and the 88 CRB METL Crude oil whole year sales may record new high since 2007. Copper Regarding the real estate sector, its space newly constructed 78 in first 5 months had increased 23.98% y/y to 28.54 million square meters, 19.44pcts higher than that in 2011. Seen in this

light, the demand growth for base metals in the U.S. may rise Jan-12 Apr-12 Jun-12 Feb-12 Mar-12 Dec-11 May-12 again. Fig 8.Construction and auto sector are main consumers Sources ：Brook Hunt, Phillip Securities of base metals

35% Fig 10. Decreased global copper grade （（（%）））

28%

21%

14%

7%

0% Copper Aluminum Zinc Lead

Construction Auto

Sources ：WIND, Phillip Securities Sources ：Brook Hunt, Phillip Securities

Generally speaking, we keep relatively optimistic about In 1H12, the demand kept weak, but the supply restrict the demand for metals in 2H12, and their prices maybe still let the copper be short. According to the report by rebound. However, we also think the market shouldn’t WBMS, the copper faced 320 thousand tons surplus in take too optimistic attitude at the rebound, because global 2011. However, 277 thousand tons copper was short in economy is still weak and difficult to realize significant first 4 months in 2012. Global copper demand got 6,903 growth. Moreover, the effect of easing monetary policies thousand tons, and the apparent demand increased 775

4 of 4 Minor Metals Sector Shanghai Equities Research 17 July 2012 thousand tons to 3,039 thousand tons in China, back the “resource is king” strategy in medium to long accounting over 44% in the world. At the same time, the term. In view of economic structural transformation, refined copper production only increased 3% y/y to 6,630 emerging industries will become more and more important thousand tons. and enjoy wider market, which can benefit the deep- processing enterprises with technology advantage. Comparatively speaking, we take more prudent attitude at Therefore, we should emphasize on the upstream and other base metals like aluminum. For example, aluminum downstream ends. faces the dilemma like high cost, swollen capacity and low profitability. Currently, its capacity utilization is low, and Specifically speaking, for the upstream end, we pick up the capacity is still growing rapidly in Western China. Jiangxi Copper （0358.HK ）, which can benefit from the When aluminum demand recovers significantly, relative advantage on the resource reserves, recent dip and manufacturers can release their capacity ASAP to meet bullish precious metals prices. Furthermore, it is with the demand. Moreover, after several electrovalence undervalued nowadays with only 7.5X P/E. hikes, the cost pressure for aluminum producers becomes more and more heavy, which makes them on the verge of Regarding the processing industry, we recommend China loss. Therefore, it is difficult for aluminum manufacturers Zhongwang （ 1333.HK ） . The Company has smoothly to hold high earning capability. achieved the market adjustment from the export to Fig 11.Aluminum price has still been adjusted domestic market and fully shouldered off previous downwards of CHALCO （（（Eastern China ，，，RMB/ton ））） predicament. Its performance has recovered continually, with the 1Q12 profit nearly tripling. Currently, it is building up three core businesses including industrial aluminum extrusion profiles, deep-processing business and high- end flat rolled products, which will help it become a rare comprehensive high added value aluminum products supplier, with profitability expected to improve obviously. Fig 12.Quarterly recovered performance of Profit model (RMB mil) 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 Revenue 2,327 1,723 1,491 2,782 2,547 3,486 3,243 Gross profit 790 412 359 522 477 864 838 ： Sources Company reports, Phillip Securities PROFIT FOR THE YEAR 467 37 165 247 254 439 491

、、、 E Emphasize on the upstream and downstream ends Gross profit margin 33.95% 23.91% 24.08% 18.76% 18.73% 24.78% 25.84% Overall speaking, we think base metal sector will get Sources ：Company reports, Phillip Securities interim trading opportunity in 2H12, and investors can seek appropriate investing chance. The financial factors including easing monetary and USD depreciation can

5 of 5 Minor Metals Sector Shanghai Equities Research 17 July 2012

PHILLIP RESEARCH STOCK SELECTION SYSTEMS Total Return Recommendation Rating Remarks >+20% Buy 1 >20% upside from the current price +5% to +20% Accumulate 2 +5% to +20%upside from the current price -5% to +5% Netural 3 Trade within ± 5% from the current price -5% to -20% Reduce 4 -5% to -20% downside from the current price <-20% Sell 5 >20%downside from the current price

We do not base our recommendations entirely on the above quantitative return bands. We consider qualitative factors like (but not limited to) a stock's risk reward profile, market sentiment, recent rate of share price appreciation, presence or absence of stock price catalysts, and speculative undertones surrounding the stock, before making our final recommendation

GENERAL DISCLAIMER This publication is prepared by Phillip Securities () Ltd (“Phillip Securities”). By receiving or reading this publication, you agree to be bound by the terms and limitations set out below.

This publication shall not be reproduced in whole or in part, distributed or published by you for any purpose. Phillip Securities shall not be liable for any direct or consequential loss arising from any use of material contained in this publication.

The information contained in this publication has been obtained from public sources which Phillip Securities has no reason to believe are unreliable and any analysis, forecasts, projections, expectations and opinions (collectively the “Research”) contained in this publication are based on such information and are expressions of belief only. Phillip Securities has not verified this information and no representation or warranty, express or implied, is made that such information or Research is accurate, complete or verified or should be relied upon as such. Any such information or Research contained in this publication is subject to change, and Phillip Securities shall not have any responsibility to maintain the information or Research made available or to supply any corrections, updates or releases in connection therewith. In no event will Phillip Securities be liable for any special, indirect, incidental or consequential damages which may be incurred from the use of the information or Research made available, even if it has been advised of the possibility of such damages.

Any opinions, forecasts, assumptions, estimates, valuations and prices contained in this material are as of the date indicated and are subject to change at any time without prior notice.

This material is intended for general circulation only and does not take into account the specific investment objectives, financial situation or particular needs of any particular person. The products mentioned in this material may not be suitable for all investors and a person receiving or reading this material should seek advice from a financial adviser regarding the suitability of such products, taking into account the specific investment objectives, financial situation or particular needs of that person, before making a commitment to invest in any of such products. This publication should not be relied upon as authoritative without further being subject to the recipient’s own independent verification and exercise of judgment. The fact that this publication has been made available constitutes neither a recommendation to enter into a particular transaction nor a representation that any product described in this material is suitable or appropriate for the recipient. Recipients should be aware that many of the products which may be described in this publication involve significant risks and may not be suitable for all investors, and that any decision to enter into transactions involving such products should not be made unless all such risks are understood and an independent determination has been made that such transactions would be appropriate. Any discussion of the risks contained herein with respect to any product should not be considered to be a disclosure of all risks or a complete discussion of such risks.

Nothing in this report shall be construed to be an offer or solicitation for the purchase or sale of a security. Any decision to purchase securities mentioned in this research should take into account existing public information, including any registered prospectus in respect of such security.

Disclosure of Interest Analyst Disclosure: Neither the analyst(s) preparing this report nor his associate has any financial interest in or serves as an officer of the listed corporation covered in this report. Firm’s Disclosure: Phillip Securities does not have any investment banking relationship with the listed corporation covered in this report nor any financial interest of 1% or more of the market capitalization in the listed corporation. In addition, no executive staff of Phillip Securities serves as an officer of the listed corporation. Availability The information, tools and material presented herein are not directed, intended for distribution to or use by, any person or entity in any jurisdiction or country where such distribution, publication, availability or use would be contrary to the applicable law or regulation or which would subject Phillip Securities to any registration or licensing or other requirement, or penalty for contravention of such requirements within such jurisdiction.

© 2012 Phillip Securities (Hong Kong) Limited

6 of 6 Minor Metals Sector Shanghai Equities Research 17 July 2012

Contact Information (Regional Member Companies)

SINGAPORE MALAYSIA Phillip Securities Pte Ltd Phillip Capital Management Sdn Bhd Raffles City Tower B-3-6 Block B Level 3 Megan Avenue II, 250, North Bridge Road #06-00 No. 12, Jalan Yap Kwan Seng, 50450 Singapore 179101 Kuala Lumpur Tel : (65) 6533 6001 Tel (603) 21628841 Fax : (65) 6535 6631 Fax (603) 21665099 Website: www.poems.com.sg Website: www.poems.com.my

HONG KONG JAPAN Phillip Securities (HK) Ltd PhillipCapital Japan K.K. Exchange Participant of the Stock Exchange of Hong Kong Nagata-cho Bldg., 11/F United Centre 95 Queensway 8F, 2-4-3 Nagata-cho, Hong Kong Chiyoda-ku, Tokyo 100-0014 Tel (852) 22776600 Tel (81-3) 35953631 Fax (852) 28685307 Fax (81-3) 35953630 Websites : www.phillip.com.hk Website: www.phillip.co.jp

INDONESIA CHINA PT Phillip Securities Indonesia Phillip Financial Advisory (Shanghai) Co. Ltd ANZ Tower Level 23B, No 550 Yan An East Road, Jl Jend Sudirman Kav 33A Ocean Tower Unit 2318, Jakarta 10220 – Indonesia Postal code 200001 Tel (62-21) 57900800 Tel (86-21) 51699200 Fax (62-21) 57900809 Fax (86-21) 63512940 Website: www.phillip.co.id Website: www.phillip.com.cn

THAILAND FRANCE Phillip Securities (Thailand) Public Co. Ltd King & Shaxson Capital Limited 15th Floor, Vorawat Building, 3rd Floor, 35 Rue de la Bienfaisance 75008 849 Silom Road, Silom, Bangrak, Paris France Bangkok 10500 Thailand Tel (33-1) 45633100 Tel (66-2) 6351700 / 22680999 Fax (33-1) 45636017 Fax (66-2) 22680921 Website: www.kingandshaxson.com Website www.phillip.co.th

UNITED KINGDOM UNITED STATES King & Shaxson Capital Limited Phillip Futures Inc 6th Floor, Candlewick House, 141 W Jackson Blvd Ste 3050 120 Cannon Street, The Chicago Board of Trade Building London, EC4N 6AS Chicago, IL 60604 USA Tel (44-20) 7426 5950 Tel +1.312.356.9000 Fax (44-20) 7626 1757 Fax +1.312.356.9005 Website: www.kingandshaxson.com

AUSTRALIA PhillipCapital Australia Level 37, 530 Collins Street, Melbourne, Victoria 3000, Australia Tel (613) 96298380 Fax (613) 96148309 Website: www.phillipcapital.com.au

7 of 7