HK/China Materials - 2014 outlook: another tough year

笑声密集

HK/China Materials - 2014 outlook: another tough year

来自：MACD论坛(bbs.macd.cn) 作者：笑声密集 浏览：2587 回复：0

Neutral-to-negative view for 2014 We maintain our neutral-to-negative view on the HK/China Materials sector. For most subsectors, capex in previous years could still worsen theovercapacity issue in China while demand will only be modest, in our view. China’s environmental focus is likely to ease some of the overcapacity situationbut it will likely be a slow process. The cement sector stands out as attractivedue to a much better demand/supply balance compared with other subsectors. Valuation-wise, cement also looks undemanding. Top pick: Anhui Conch. Lower prices and poor D/S remain key challenges for China Materials Other than cement, most of the Other Materials subsectors start 2014 withmuch lower prices relative to their 2013 level. In the meantime, it remainsdifficult for us to see significant upside for underlying commodity prices. Interms of demand, a strong pick-up could be tough as money velocity remainslow and YoY momentum in China property sales should start to face higherbase effects. Without strong demand, YoY growth of 10-20% in investment/capex for most subsectors (except cement and steel) will cap any upside in –or even weaken – commodity prices. Environmental efforts might help to constrain supplies Across the sector, we are relatively less negative on the fundamentals in thecement, steel and aluminium subsectors where the Chinese government’senvironmental focus is likely to ease the overcapacity situation. For thesesubsectors, the demand/supply balance should show some improvement dueto supply constraints caused by much stricter environmental measures. Nevertheless, for steel and aluminium, we believe the process of D/Simprovement will likely remain slow as the market’s structural improvement isstill dependent on real market-driven consolidation in China. Overall, cement > steel > aluminium > paper > copper > gold > coal Our subsector order of preference is as follows: cement, steel, aluminium,paper, copper, gold, and coal. We base our ranking on the 2014demand/supply growth rates of all the subsectors. Cement stands out ashaving the best demand/supply dynamics in 2014. We believe there will be aslight improvement in utilization rate for steel and aluminium. For theremaining subsectors, capacity growth might still outpace demand growth in2014 and thus the demand/supply balance could continue to deteriorate. Most still trade below book and cement looks cheap; top pick: Anhui ConchGiven the low ROAE for most subsectors, we believe Materials sector equitieswill mostly trade within a 0.5x to 0.8x book value range along with seasonaldestocking/restocking. The trade might be even less “sticky” than it was in2013 as there are few structural positives for the sector. Given its attractivefundamentals, the valuation of the cement sector looks undemanding. Mostcement stocks are yielding 10%+ ROAE in 2014E but they are trading at orbelow book value and single-digit 2014E PE. Without other good “Buy” ideasin the Materials sector, the likely valuation of the cement sector may be furtherstretched. Our top pick is Anhui Conch for its low-cost operations and potentialfor value-accretive acquisitions. Major risk: dramatic monetary policy in China.