Price recovery in all segments; upgrading Xiamen Tungsten to Buy from Sell
   
We envision a comprehensive recovery in Xiamen Tungsten's major segments,including rare earth, battery materials, tungsten and cemented carbide. Weexpect major rare earth elements such as Pr and Nd to see a sustainableprice recovery on tightened supply control and decent EV growth (thus magnetdemand). Battery materials' margin should continue to improve as well oncethe company ramps up its high nickel ternary material plants in 2018and2019. Moreover, APT (Ammonium Paratungstate) and cemented carbide pricescontinue to recover thanks to strong cutting tools and mining machines output.We thus upgrade our rating from Sell to Buy, with a target price of RMB35.
   
Rare earth - positive on Nd and Pr thanks to supply control and decent demand
   
With the government's supply control (quota, SRB buying and crackdown onillegal mining), and decent demand from magnets/EV growth, we expect deficitsin rare earth elements such as Pr and Nd. Tb, although in surplus, entered easilyinto deficit territory upon SRB buying given its smaller market size of only 400tpa+. Xiamen Tungsten, one of the six major rare earth companies with c.2000theavy rare earth quota (c.11% of China's total heavy rare earth mining quota), isa direct beneficiary, in our view. Moreover, although we are neutral on magnets'profitability given its nature as a processor, we expect Xiamen Tungsten's magnetmargin to improve on the higher utilization rate.
   
Ternary materials - an emerging leader
   
We view Xiamen Tungsten as an emerging leader in cathode materials withits new plants of 10K/6K/20K ternary materials capacity in 2H18and 2019,respectively. We expect its margin to see a meaningful improvement in theupcoming years because ternary materials, as the mainstream cathode materialsadopted in EV currently, enjoys a better margin compared to the single-digitmargin for LCO used in portable devices.
   
Tungsten and cemented carbide - still the most profitable segment
   
In addition to the good momentum in rare earth and ternary materials, thetungsten segment so far continues to be the major contributor to XiamenTungsten's bottom line, thanks to APT and the cemented carbide price recoveryon decent demand. China's cutting tools machine output, one of cementedcarbide's downstream channels, experienced c.9% YoY growth in June 2017YTD.Mining machines like excavators saw 100% YoY growth in the first half-year.