Upside for building material players

Back to normal: People walking along a street in Sheung Shui near the border of mainland China in Hong Kong ahead of the reopening of the border on Jan 8. — AFP

PETALING JAYA: Companies in the building materials sector may see some upside from China’s reopening, which has stimulated demand for aluminium, ferroalloy and tin.

UOB Kay Hian (UOBKH) Research noted that prices of these hard commodities have gradually rebounded on the back of China’s economic reopening.

The research firm said prices of exported commodities had retraced to a lower range in the second half of 2022 (2H22) after reaching a new record high in 1H22. This was mainly due to the weak market sentiment amid the rising interest rate environment.

“Going into 2023, China is ending its Covid-19 quarantine requirement for travellers, marking the last major shift from its zero-Covid policy. After almost three years, China finally reopened its borders and this news sent commodity prices through the roof,” said UOBKH Research in a sector update.

The research firm believes that commodity prices will be supported by higher demand from the construction and industrial sectors, additional restocking ahead of the Chinese New Year holidays, plus stimulus from the Chinese government to boost its economy.

“China has been dishing out favourable policies to help the ailing property market recover from its historical slump. The government plans to help improve the balance sheet of the developers by extending debt and providing equity financing for them,” said UOBKH Research, noting that China recently announced that it will inject around 85 billion yuan (RM53.8bil) via reverse repos and provide 162 billion yuan (RM102.6bil) in new credit lines to private developers.

“This will help to improve home-buyer confidence with household savings remaining elevated after years of limited consumption, implying strong pent-up demand potential for properties,” said the research firm.

However, the recovery could be bumpy as market sentiment is still expected to remain volatile in the near term, given that a commodity rally will add to the ongoing inflationary pressures, which central bankers around the world are trying to get under control.

There are still rampant Covid-19 infections in China currently, which may dampen the recovery.

According to UOBKH Research, a “robust and consistent fiscal policy is required to see a substantial and sustained increase in commodity prices”.

“Nevertheless, we believe hard commodity prices will remain at the higher end of the historical range, backed by favourable long-term structural supply-demand dynamics and the global decarbonisation agenda.

“We expect local smelters to post healthy earnings growth this year, as the industry is entering a prolonged period of high selling prices and margins backed by greater traction for commodities due to growing global demand.”

The research firm maintains an “overweight” call on the sector, with top stock picks being Press Metal Aluminium Holdings Bhd and OM Holdings Ltd (OMH).

“Press Metal continues to be a prime beneficiary of strong aluminium prices backed by structural supply shortage and robust demand. Riding on such favourable trends, it has hedged 35% of US$2,400 to US$2,500 (RM10,298 to RM10,727) per tonne for 2023,” said UOBKH Research.

Based on the research firm’s analysis, every US$100 (RM429) per tonne change in its aluminium price assumptions would affect Press Metal’s earnings by about 9% a year.

As for OMH, UOBKH Research said it was in a sweet spot to benefit from elevated ferroalloy prices, backed by structurally favourable supply-demand dynamics.

“Our target price implies eight times 2023 forecast price-earnings (versus the five-year mean at 15 times). OMH’s use of low-cost eco-friendly hydropower, tax benefits and long-term earnings visibility via its capacity expansion and diversification plans put it ahead of its global peers.”

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