Domestic companies engaged in steelmaking, power supply and coal mining will be the top market buys for 2004, a Shanghai Shenyin & Wanguo Research & Consulting Co Ltd report predicts.

Strong earnings growth will increase share prices by up to 20 percent on the local market next year from their current levels, the report said.

"China's fast-growing economy will provide a solid basis for the continuing strength upon these industries," said the report compiled by the securities consulting firm's research arm.

The country's economy is expected to expand by around 8.5 percent next year, pushing up the demand for steel, electricity and coal.

Economic growth in China reached 8.5 percent in the first quarter of 2003 and is expected to maintain an 8.5 percent growth rate for the year, according to the National Bureau of Statistics.

The cyclical sector, such as those experienced by steelmakers whose earnings performance moves in line with the economic cycle, will undoubtedly benefit from the robust economy.

"The demand for steel will still be on a fast rise in 2004 as the fixed-asset investment and the industrial-added value, two key factors that will affect the steelmaking industry, are expected to grow at a swift pace," the report said.

As a result, this will push steel prices up to 4,050 yuan (US$487.95) a ton next year, up 1.25 percent from 2003. The total steel output next year is expected to rise 13 percent to 261 million tons, according to the report. Steel sector profits will increase 8 percent to 41.9 billion yuan.

The report recommended a "buy" on Shanghai Baoshan Iron and Steel Co Ltd, the country's most profitable steelmaker, and Wuhan Steel Processing Co Ltd.

Although the power sector is not cyclical, China's breakneck economic growth has already left much of the country short of electricity, largely due to under-investment in the past few years.

As many as 19 municipalities and provinces suffered power blackouts this past summer when the temperature rose to record highs.

"Power supply is expected to increase by 12 to 13 percent next year, but the demand would still exceed the supply," said the report, which predicted that China's power plants will produce 1.75 trillion kilowatt-hours of electricity in 2004.

The power sector would also generate total profits of 36.2 billion yuan next year, up 22.3 percent from 2003.

As coal is needed to process steel and generate electricity, the boom in steelmaking and power supply would provide a boost to companies that cover the coal mining business.

China will mine 12 percent more coal next year to meet demand, bringing the output up to 1.57 billion tons, the report said. Profit is expected to rise 24.99 percent to 10.19 billion yuan for the industry in 2004.

The report was also bullish on the automobile, airline, nonferrous metal and petrochemical sectors.

Boosted by such sectors, per-share earnings for the 1,200-plus companies traded on the Shanghai and Shenzhen stock markets are expected to grow 10 percent next year over 2003, the report said.

From January, China's public companies will start releasing fiscal reports for the year ending December 2003.

The report also forecast a per-share earning of 0.186 yuan for 2003, an increase of 30 percent from a year earlier.

The benchmark Shanghai Composite Index would rise to a high of 1750 points next year, up nearly 20 percent from the current level. The index closed at 1446.28 on Friday, the last trading session.

"We believe that the correction is already moving toward the end," according to the report.

(Shanghai Daily December 22, 2003)