BNP Paribas Securities Asia research is available on Thomson One, Bloomberg, TheMarkets.com, Factset and on http://equities.bnpparibas.com. Please contact your salesperson for authorisation. Please see the important notice on the inside back cover. TARGET HKD9.80 PRIOR TP N/A Chalco 2600 HK CLOSE HKD7.51 BUY CHINA / METALS & MINING UP/DOWNSIDE +30.5% PREPARED BY BNP PARIBAS SECURITIES ASIA Concerns overdone, buy on dips ƒCorrection in aluminium prices offers re-entry opportunity, in our view.ƒChalco’s earnings highly leveraged to aluminium prices. ƒManagement putting in a lot of effort to reduce production costs. ƒInitiate with BUY and target price of HKD9.80. Recent price correction offers a re-entry opportunity, in our view We believe the recent ~15% retreat in aluminium price from the latest peak, due to faster-than-expected tightening in China, offers a good re-entry opportunity to play the sector given the positive industry outlook. Our aluminium price forecast is USD2,100/tonne (USD0.95/lb) for 2010 and USD2,200/tonne (USD1.00/lb) for 2011. We expect aluminium price to be well supported by a recovery in demand, a disciplined restart of idle capacity, limited capacity addition after 2010 in the world outside China, a tight spot market, restocking, and locked-up inventory by financing deals. Our long-term aluminium price estimate of USD2,400/tonne (USD1.09/lb) is underpinned by the high capital cost of greenfield projects in the world outside China. Chalco’s earnings highly leveraged to aluminium prices Chalco’s earnings are highly leveraged to aluminium prices, as its production cost is higher than peers’. Our sensitivity analysis shows that every 1% change in aluminium price would result in an 8.1% change in net profit in 2010. Meanwhile, Chalco is making big efforts to lower its production costs by increasing central procurement, improving the self-sufficiency ratio for bauxite ores, optimizing production flow, building cost-competitive greenfield projects, contracting more direct power purchase and improving technology to reduce electricity consumption. Exploring overseas opportunities Chalco aggressively explores opportunities in the overseas markets to secure more self-owned bauxite resources and build low-cost greenfield aluminium plants. We expect the expansion into the overseas markets to help the company improve its bauxite self-sufficient ratio and also lower the aluminium production cost by using cheaper energy. Initiate with BUY and target price of HKD9.80 We initiate coverage of Chalco with a BUY rating and target price of HKD9.80, derived from a DCF valuation, assuming 3.7% of risk-free rate, 12.2% market-risk premium and 1.19 beta. We assume WACC of 12.6% and long-term of 0%. Our target price implies 1.84x 2010E P/BV and 1.66x 2011E P/BV, which is 25.1% and 12.9% higher than the stock’s historical average of 1.47x. Key downside risk to our TP for Chalco is stronger-than-expected liquidity contraction and faster-than-expected idle capacity restart in the world outside China.1 March 2010HOW WE DIFFER FROM THE STREET BNP Consensus % Diff Target Price (HKD) 9.80 9.44 3.8 EPS 2009 (RMB) -0.17 -0.15 nm EPS 2010 (RMB) 0.41 0.39 2.6 Positive Neutral Negative Market Recs. 12 8 3 KEY STOCK DATA YE Dec (RMB m) 2009E 2010E 2011E Revenue 63,686 94,914 104,489 Rec. net profit (2,290) 5,478 7,846 Recurring EPS (RMB) -0.17 0.41 0.58 Prior rec. EPS (RMB) - - - Chg. In EPS est. (%) N/A N/A N/A EPS Growth (%) (3,795.2) (339.2) 43.2 Recurring P/E (x) (38.5) 16.1 11.2 Dividend yield (%) 0.8 0.0 1.8 EV/EBITDA (x) 24.6 8.2 6.5 Price/book (x) 1.7 1.5 1.4 Net debt/Equity 85.4 70.1 53.3 ROE (%) (4.3) 10.0 13.0 357911Feb-09 May-09Aug-09Nov-09Feb-10(HKD)(13)72747(%)ChalcoRel to MSCI China Share price performance 1 Month 3 Month 12 Month Absolute (%) (30.1) (15.1) 70.3 Relative to Country (%) (20.7) (5.5) 17.2 Next results April 2010 Mkt cap (USD m) 12,907 3m avg daily turnover (USD m) 35.4 Free float (%) 63 Major shareholder Chinalco (37%