20181127-中国银河国际证券-COMMODITIES_UPDATE__INDUSTRIAL_METALS_TO_REMAIN_LACKLUSTRE__GOLD_IS_PREFERRED_5页_1mb

Commodities Update Summary: Industrial Metals to Remain Lacklustre; Gold is Preferred

Core Content Overview

This strategy note provides an analysis of the recent performance and outlook for major commodities, with a focus on industrial metals and gold. It also evaluates specific Chinese-listed companies in the sector, highlighting their valuation, dividend yields, and potential for future performance.

Major Commodities Performance

• Crude Oil: Prices have fallen approximately 25% over the past six months, driven by trade war uncertainties and increased supply from Iran due to U.S. sanctions waivers.
• Industrial Metals:
  • Aluminum: Prices in China have dropped about 8% since late August due to increased supply and weak demand from the property and auto sectors.
  • Copper: Prices have fallen 14% since June, with demand concerns intensifying due to trade tensions between China and the U.S.
• Gold: Has outperformed other commodities, dropping only 5.8% over the same period. This is attributed to trade war uncertainties and declining global gold production.

Key Investment Recommendations

• Zhaojin Mining (1818.HK):
  • Reiterated as BUY.
  • Expected to achieve a 35%+ EPS CAGR from 2018–2019 if gold prices rise by 5%.
  • Valued at 25x 2019 PER, with a 18% upside from current levels.
• Shenhua Energy (1088.HK):
  • Attractive due to a 6% dividend yield.
  • Lower coal prices may be offset by improved profitability in its IPP (Independent Power Producer) business.
• China Molybdenum (3993.HK):
  • Previously strong due to cobalt price rallies, but cobalt prices have dropped >40% since mid-March.
  • Downside risk for cobalt prices in 2019 due to new supply expected in the second half of the year.
• CNOOC (0883.HK):
  • Share price is vulnerable after a sharp fall in oil prices.
  • May continue to decline if oil prices do not rebound significantly.
  • Share price has not fully tracked oil price movements in recent months.

Valuation Table Highlights

Main Views and Outlook

• Gold: Maintained a positive outlook due to trade war uncertainties and weak global production. Expected to rise 5% by 2019, making it a preferred asset for investors seeking a hedge against market volatility.
• Industrial Metals: Expected to remain weak in the short to medium term due to subdued demand and increased supply. Copper and aluminum are particularly affected by trade tensions and economic slowdown.
• Coal: Prices have dropped 10% in the peak season, but the CGS A-share team expects a lack of sharp decline due to tight supply and regulatory controls on imports.
• CNOOC: Vulnerable to further price declines if oil prices do not rebound, especially following the recent drop in oil prices and the OPEC meeting in December.

Key Factors Influencing Prices

• Demand Weakness: Trade disputes, economic slowdown, and reduced industrial activity have dampened demand for industrial metals.
• Supply Dynamics: Increased supply from China and new production in other metals (e.g., cobalt) has pressured prices.
• Trade War Uncertainties: A major driver for gold's strong performance and a negative factor for industrial metals.
• Dividend Yields and Valuation: Companies like Shenhua Energy and Jiangxi Copper are seen as attractive due to high yields and low PBRs.

Conclusion

The commodities market remains challenging, with industrial metals struggling due to weak demand and supply pressures. Gold, however, is viewed as a more resilient asset, supported by trade war uncertainties and declining production. The report recommends focusing on gold and certain coal and metals stocks that offer value and potential for recovery.