《2010年1月中国金属与矿产行业市场研究报告(英文版)》(66页).rar More　signs　of　growth　strength,　more　signs　of　inflation　acceleration (1)　Commodity　prices　have　surged　20%　since　the　beginning　of　4Q09　as demand　growth　accelerates；　see　our　Nov　6　report　titled＂Taking　the　pulse of　construction　value　chain；　growth　accelerating＂. (2)　With　higher　growth,　we　see　higher　inflation　risk.　Our　channel　checks indicate　the　infrastructure　bottleneck　is　so　severe　that　demand　for　cargo transportation　vs.　fulfillment　at　one　major　railway　bureau　has　spiked　to 2.5:1　compared　to　1:1　fulfillment　in　4Q08　and　below　50%　utilization. (3)　We　maintain　our　view　that　China　demand　will　remain　structurally strong　although　the　path　may　become　more　volatile.　We　expect　a higher　risk　premium　for　the　sector　as　policy　tightening　risk　rises　with inflation　pressure.　Initial　signs　of　a　slowdown　in　property　sales　prompt us　to　search　for　protection　in　margins　and　multiples. Look　for　margin　security,　which　varies　along　the　value　chain (1)　Upstream　sectors　likely　to　have　better　pricing　power,　although　rising demand　is　generally　positive　for　all　commodity　prices. (2)　Midstream　processing　(steel/aluminum/cement),　could　face　margin pressure　on　two　fronts:　Raw　material　cost　pressure　from　upstream　and demand　impact　of　potential　policy　tightening. (3)　Analysis　of　previous　two　cycles　(2003/04　and　2006/08)　shows: -Upstream　coal　industry　margins　peaked　6-9　months　after　CPI. -The　peak　in　midstream　processing　(steel/metal)　margins　almost　coincided with　CPI　rising　above　3%,　but　preceded　CPI＇s　peak　by　4-9　months. Look　for　multiple　protection　as　path　gets　bumpier　and　risk　rises (1)　Our　analysis　of　two　previous　cycles　shows　the　peak　in　equity　multiples for　processing　sub-sectors　largely　coincided　with　the　margin　peak　and when　CPI　hit　3-4%.　Currently　Chalco/JXC/Conch　valuations　are　close　to those　peak　levels.　Our　standard　deviation　(SD)　screen　shows　JXC　and Conch　now　trade　above　1　SD　(excluding　2007＇s　unsustainable　valuations). (2)　Sub-sectors　with　undemanding　multiples/earnings　visibility,　e.g. coal,　should　outperform.　YCM＇s　share　price　hit　new　highs　in　May　2008,　7 months　post　the　Oct　2007　market　peak,　3　months　after　the　CPI　peak. (3)　Stock　actions:　Add　YCM　(H)　to　CL-Buy,　Chalco　(H)　to　CL-Sell.　We upgrade　Shenhua(A)/China　Coal(A)　to　Buy,　downgrade