China / Hong Kong Company Guide Jiangxi Copper Version 4 | Bloomberg: 358 HK EQUITY | Reuters: 0358.HK | Bloomberg: 600362 CH EQUITY | Reuters: 600362.SS Refer to important disclosures at the end of this report DBS Group Research . Equity 1 Apr 2020 H: BUY Excessive discount despite lowering Last Traded Price (H) ( 31 Mar 2020):HK$7.16(HSI : 23,603) earnings Price Target 12-mth (H):HK$10.00(39.7% upside) (Prev HK$11.80) Reduce TPs after lowering price forecast. We reduce our TP on A- and A: HOLD H-share of Jiangxi Copper to RMB12 and HK$10 respectively, and maintain our HOLD call on A-share and BUY call on H-share. This Last Traded Price (A) ( 31 Mar 2020):RMB12.63(CSI300 Index:3,686) Price Target 12-mth (A):RMB12.00(5.0% downside) (Prev RMB16.40) follows our 44% downward revision on FY20F EPS after lowering our copper price forecasts for 2020 by 16%. In 2019, despite a 12% Analyst revenue growth, the company registered only a 1% net profit growth, LEE Eun Young+65 6682 3708 [email protected] below our expectations, due to higher operating and interest costs What’s New after acquiring Humon Smelting Co. Ltd (Humon). However, it guided • 2019 results below our expectations due to higher SG&A for strong output growth for its products, especially 54%/58% and R&D cost after acquisition of Humon Smelting growth for gold/silver which will be contributed by Humon. We retain • Positive output growth of gold in Humon to buffer a positive view on the company over the long term given i) its earnings earnings decline from fall in copper prices growth potential and business diversification from M&A of Humon, ii) • Revise down earnings forecasts along with lower copper that it is enhancing its self-sufficiency ratio for copper concentrates by price forecast securing an 18% stake in First Quantum Minerals. Meanwhile, its H- • Reduce TPs, maintain HOLD for A- and BUY for H-share at share price has plummeted c.40% since Jan and is currently trading at attractive valuation 0.4x P/BV, lower than that during the GFC. Price Relative Where we differ: More conservative earnings forecasts than the street. HK$ Relative Index RMB Relative Index Our forecasts for FY20F/FY21 EPS are lower than market consensus. 15.7 218 23.0 209 198 13.7 21.0 189 178 169 This would stem from our conservative view on copper prices which 19.0 11.7 158 149 138 17.0 9.7 118 129 15.0 factors in the negative impact from COVID-19. 98 109 7.7 78 13.0 89 5.7 58 11.0 69 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Potential catalysts: Securing more mines and reducing trading Jiangxi Copper (LHS) Relative HSI (RHS) Jiangxi Copper(A) (LHS) Relative CSI300 Index (RHS) business. On top of that, the company evaluated that the trading Forecasts and Valuation (H Shares) business has resulted in bad debts rather than contribute positively to FY Dec (RMBm) 2018A 2019A 2020F 2021F Turnover 214,395 239,585 227,975 242,455 group earnings. We believe this new strategy should enhance its EBITDA 5,668 6,325 5,582 6,755 earnings visibility and profitability. Pre-tax Profit 3,262 3,135 2,171 2,997 Valuation: Net Profit 2,415 2,438 1,688 2,331 Net Profit Gth (Pre-ex) (%) 46.3 1.0 (30.8) 38.1 Our TP of HK$10 for H-share is pegged to 0.6x FY20F P/BV which is EPS (RMB) 0.70 0.70 0.49 0.67 based on a 30% discount to regional peers’ average. Meanwhile, our EPS (HK$) 0.76 0.77 0.53 0.74 TP for A-share of RMB12 is derived from 0.775x P/BV, which is at a EPS Gth (%) 46.3 1.0 (30.8) 38.1 Diluted EPS (HK$) 0.76 0.77 0.53 0.74 10% discount to peer average. This is justified by its lower ROE as compared to peers’. DPS (HK$) 0.22 0.11 0.11 0.11 BV Per Share (HK$) 15.73 16.67 17.10 17.72 Key Risks to Our View: PE (X) 9.4 9.3 13.4 9.7 P/Cash Flow (X) 2.8 2.8 3.7 8.2 Key downside risks are copper price volatility and hedging risk. Decrease P/Free CF (X) 3.7 4.1 6.4 240.3 in TCs/RCs would also be a negative. EV/EBITDA (X) 4.6 6.2 8.6 7.7 Net Div Yield (%) 3.1 1.5 1.5 1.5 At A Glance P/Book Value (X) 0.5 0.4 0.4 0.4 Issued Capital - H shares (m shs) 1,387 Net Debt/Equity (X) 0.0 0.2 0.3 0.4 - Non H shrs (m shs) 2,075 ROAE(%) 5.0 4.8 3.2 4.2 H shs as a % of Total 40 Earnings Rev (%): (44) (33) Total Mkt Cap (HK$m/US$m) 38,620 / 4,982 Consensus EPS (RMB) 0.73 0.86 Major Shareholders (%) Other Broker Recs: B:9 S:0 H:7 Jiangxi Copper Corporation Limited 58.1 Source of all data on this page: Company, DBS Bank (Hong Kong) Limited Major H Shareholders (As % of H shares) (“DBS HK”), Thomson Reuters Jiangxi Copper Corporation Limited 18.0 H Shares-Free Float (%) 82.0 3m Avg. Daily Val. (US$m) 6.44 GICS Industry: Materials / Metals & Mining ed-TH / sa- CS /AH Company Guide Jiangxi Copper WHAT’S NEW Oversupply from weakened copper demand to push down Conservative for short term, positive for long term copper prices in 2020. We forecast that in 2020, copper price will plummet to US$5,100/ton (-15% y-o-y) due to 2019 earnings below our expectation, dragged by higher oversupply in the market from dampened copper administrative and R&D expenses. In 2019, Jiangxi Copper consumption. The outbreak of COVID-19 resulted in recorded revenue of RMB239bn (+12% y-o-y), supported by production slowdown in China’s construction and automobile volume growth from the acquisition of Humon Smelting. industries in 1Q20. While China’s downstream industries are However, pretax profit and EBITDA came in below our slowly picking up their momentum, ex-China copper demand estimates at RMB3.1bn (-4% y-o-y) and RMB5.8bn (+20% y- is now facing a downturn as the virus spreads worldwide, o-y) respectively. Earnings were dragged down by larger- particularly in Europe (15% of global copper consumption). than-expected administrative expense of RMB2.4bn and R&D Hence, we expect the copper market to experience a 198k- expense of RMB414m, which increased by 35% and 100% y- ton market surplus in 2020, exerting downward pressure on o-y respectively. The increase in administrative expenses was copper prices. However, based on the assumption that mainly due to the acquisition of Humon Smelting and its COVID-19 fizzles out in 2H20, we expect the market to return inclusion in the consolidated statement, while Jiangxi Copper to a deficit position from 2021 as demand growth will be increased R&D spending on scientific research. Overall, its net supported by the Chinese government’s fiscal policies to profit came in at RMB2.44bn (+1% y-o-y), 12% below our boost economic growth. initial estimates. In 2019, mined copper production increased by 1.6% y-o-y, Reduce TPs but shares are trading at a big discount We backed by production increase in America (+1.8% y-o-y) and reduce our TPs for the A- and H-shares of Jiangxi Copper to Africa (+5.2% y-o-y) regions. Refined copper production RMB12 and HK$10 respectively, while maintaining our HOLD increased minimally by 0.3% y-o-y, as smelting and refinery call on A-share and BUY call on H-share. This follows our capacity growth was offset by smelter shutdowns for 44% downward revision on FY20F EPS after lowering our maintenance in Chile. Meanwhile, copper consumption copper price forecasts for 2020 by 16%. However, we retain deteriorated by 0.2% y-o-y due to negative growth in the a positive view on the company over the long term given i) its automobile sector. This has led to a copper market deficit of earnings growth potential and business diversification from 165k tons in 2019, which narrowed from a 275k-ton deficit M&A of Humon, ii) that it is enhancing its self-sufficiency in 2018. ratio for copper concentrates by securing an 18% stake in of First Quantum Minerals, the world’s eighth largest copper mine. Meanwhile, its H-share price has plummeted c.40% since Jan and is currently trading at 0.4x P/BV, lower than that during the GFC. RMB1bn financial assistance from controlling shareholder at a low interest rate. Jiangxi Copper will borrow from its controlling shareholder, Jiangxi Copper Corporation Limited (JCC), RMB1bn at an interest rate of 1.89% over a term of 90 days. The interest rate is much lower than the National Interbank Funding Center’s loan prime rate of 4.05% for loans of the same term and accordingly, Jiangxi Copper is likely to benefit from the reduced financial burden. The financial assistance will either be used as the company’s working capital or for the repayment of its bank loans. Note that Jiangxi Copper had borrowed a total of RMB11.3bn from JCC in the last 12 months and the remaining balance stands at RMB8.5bn.