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China Molybdenum Co Ltd

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China Molybdenum Co Ltd China / Hong Kong Company Guide China Molybdenum Co Ltd Version 1 | Bloomberg: 3993 HK Equity | 603993 CH Equity | Reuters: 3993.HK | 603993.SS Refer to important disclosures at the end of this report DBS Group Research . Equity 1 Aug 2019 H: HOLD(Re-instating coverage) Stabilising cobalt market outlook Last Traded Price (H) ( 31 Jul 2019):HK$2.26(HSI : 27,778) Reinstate HOLD with TP of HK$2.6. Cobalt prices have started to Price Target 12-mth (H):HK$2.60 (15.0% upside) stabilise at 2016 low level on the back of reported decline 15% YTD (c.840 tonnes end-Jul) in cobalt inventory. We expect cobalt supply (Re-instating coverage) A: HOLD to slow due to stricter illegal mining regulation in the Democratic Last Traded Price (A) ( 31 Jul 2019):RMB3.62(CSI300 Index : 3,835) Republic of the Congo (“DRC”) and copper concentrate market Price Target 12-mth (A):RMB3.70 (2.2% upside) supply to turn tight. At our stable cobalt and copper price outlook of Analyst US$12/US$13 per lb and US$5,800/US$6,000 per tonne for 2019/ Duncan CHAN+852 36684178 [email protected] 2020 respectively, we expect China Molybdenum (“CMoC”) will What’s New maintain stable profit margins towards 2020. Despite CMoC’s share • Stabilising cobalt price outlook price has fallen to its pre-acquisition of Tenke Fungurume Mining (“TFM”) level, current valuation is not attractive; reinstating HOLD. • Battery supply chain restock and stricter illegal Where we differ: Despite new nickel cobalt manganese (“NCM”) mining regulation to drive inventory drawdown technology reduces the use of cobalt per unit of battery production, • Penetration of NCM materials in China support cobalt we believe growing market penetration of NCM materials from 46% consumption in midterm in 2018 to 51% in 2020, remains supportive for cobalt consumption. Meanwhile, we expect China’s new energy vehicle • Reinstate HOLD with TP of HK$2.6 (“NEV”) penetration rate to reach 6.6% by 2020 from 4.5% in 2018 Price Relative under the government’s development plan. Thus, we foresee cobalt consumption would continue to grow at high single digit in 2019 and 2020. It would keep cobalt market to stay balance in midterm. Raising stake in Tenke (cobalt) mine to 80% from 56% and to acquire the world’s third largest metal trading arm IXM. CMoC had proven track record in M&As (acquired TFM in 2016) to ride on the subsequent cobalt price rally. As such, the increase in stake could be another catalyst for a re-rating. Valuation: Forecasts and Valuation (H Shares) FY Dec (RMBm) 2017A 2018A 2019F 2020F CMoC is currently trading at below -1.5SD of its 3-year historical Turnover 24,148 25,963 19,236 19,827 mean at 1.1x FY19F P/BV. Considering CMoC’s earnings outlook EBITDA 11,437 11,594 8,196 8,416 remains largely stable, we believe CMoC is fairly traded at current Pre-tax Profit 5,382 6,990 3,529 3,800 Net Profit 2,728 4,636 2,080 2,240 valuation. Our TP of HK$2.6ps represents 1.2x FY19F P/BV. Our Net Profit Gth (Pre-ex) 173.3 69.9 (55.1) 7.7 target valuation for A-shares is RMB3.7, based on 2.0x P/BV. (%)EPS (RMB) 0.14 0.21 0.10 0.10 EPS (HK$) 0.16 0.24 0.11 0.12 Key Risks to Our View: EPS Gth (%) 142.3 49.9 (55.1) 7.7 Commodity price risks and geo-political risks. Diluted EPS (HK$) 0.16 0.24 0.11 0.12 At A Glance DPS (HK$) 0.10 0.13 0.05 0.05 Issued Capital - H shares (m shs) 3,933 BV Per Share (HK$) 2.28 2.16 2.11 2.05 PE (X) 13.9 9.3 20.6 19.2 - Non H shrs (m shs) 17,666 P/Cash Flow (X) 4.5 4.6 5.0 7.6 H shs as a % of Total 18 P/Free CF (X) 10.5 9.4 nm 16.1 Total Mkt Cap (HK$m/US$m) 80,116 / 10,240 EV/EBITDA (X) 3.7 4.3 6.6 6.5 Major Shareholders (%) Net Div Yield (%) 4.3 5.5 2.2 2.3 Cathay Fortune Corp. 30.2 P/Book Value (X) 1.0 1.0 1.1 1.1 Luoyang Mining Group Co., Ltd. 30.2 Net Debt/Equity (X) CASH CASH 0.0 CASH Beixin Ruifeng Fund Management Co., Ltd. 5.4 ROAE(%) 9.6 11.7 5.1 5.7 Major H Shareholders (As % of H shares) 0 Cathay Fortune Corp. 7.7 Earnings Rev (%): New New GIC Private Limited 7.0 Consensus EPS (RMB) 0.11 0.13 H Shares-Free Float (%) 85.3 Other Broker Recs: B: 4 S: 4 H: 4 3m Avg. Daily Val. (US$m) 8.52 ICB Industry: Basic Materials / Mining Source of all data on this page: Company, DBS Bank (Hong Kong) Limited (“DBS HK”), Thomson Reuters Bloomberg ESG disclosure score (2017)^ 40.9 - Environmental / Social / Governance 41.9 / 33.3 / 46.4 ^ refer to back page for more information ed-TH / sa- CS /DL Company Guide China Molybdenum Co Ltd WHAT’S NEW would be the beneficiary as its cobaltous hydroxide output is Stabilising cobalt market outlook mainly sold to refineries overseas and volumes are basically locked in as per contract terms. Stabilising cobalt price outlook. Cobalt prices have started to Copper: Tight supply of copper to support price. Low copper stabilise at 2016 low level on the back of reported decline prices in 2015-16 led to a collapse in investments in the 15% YTD (c.840tonnes end-Jul) in cobalt inventory at sector. While it usually takes three years to ramp up capacity warehouses, as the battery supply chain to restock. We at a new copper mine, supply has tightened since 2017. expect cobalt supply to slow due to stricter illegal mining Chile, the world’s largest copper producer representing 27% regulation in the DRC and copper concentrate market supply of the world’s output, saw its production sliding by 7.1% y-o- to turn tight. At our stable cobalt price outlook of y for the first quarter of 2019. The 2019 China copper TC US$12/US$13 per lb for 2019/ 2020 respectively, we expect (treating charge) has declined by 32%, hitting a five-year low, CMoC will maintain stable margins towards 2020. suggesting lower availability of copper concentrates. So far in 2019, we have seen the prolonged stoppage of production at Riding on cobalt consumption rebound and the deployment mines in Chile due to persistent union strikes. This could of NCM materials. China’s NEV output for the first six months further escalate supply uncertainty. Besides, China’s expected of 2019 surged by 48% y-o-y to 614,000 units. According to ban on scrap copper imports (for Category scrap #6 plus #7) China Association of Automobile Manufacturers, China could affect c.15% of the country’s raw material supply. production of electric vehicles, at their latest forecast of Meanwhile, we maintain our copper price assumption at 1.5mn units for 2019, representing an increase by 18%, and US$5,800/US$6,000 per tonne for 2019/2020. China’s electric vehicle penetration rate up to an estimated of 5.7% in 2019 and 6.6% in 2020. According to Adamas Hoping good acquisition performance to repeat. CMoC had Intelligence, 6.7GWh of NCM battery capacity was deployed proven track record in M&As, acquiring Tenke Fungurume globally in newly sold passenger BEVs, PHEVs and HEVs, up Mining (“TFM”) in 2016 to ride on the subsequent cobalt 69% on year, citing that the battery supply chain restocking. price rally. Meanwhile, CMoC increased its stake in TFM, the In China, we noticed that the market share of NMC ternary copper-cobalt mine in southeast of the DRC, to 80% from material in NEV batteries had increased to 46% in 2018, 56%, as pre-alerted since April 2017. The deal indicates the versus 38% in 2017. This is thus is supportive of cobalt company’s confidence in the future of the cobalt market. demand. Moreover, CMoC also announced in December 2018 its acquisition of a 100% stake in a Swiss mineral trader IXM Beneficiary of acceleration replacement demand for 5G (formerly known as Louis Dreyfus, which is the world’s third smartphone in China. In China, the Ministry of Industry and largest after Glencore and Trafigura, and specialises in the Information Technology is starting to issue 5G licenses, along trading of metals. This could enable the company to acquire with the coverage of signal networks ahead. Meanwhile, the first-hand market information and strengthen the company’s battery capacity required to satisfy the expanding phone sales channels. We have not factored in this deal in our market is increasing into the second half of the year. We earnings projection. believe that replacement needs for the smartphone segment and the derived demand in other consumer products, namely Reinstating HOLD with TP of HK$2.6. CMoC’s 1Q19 results laptop and mobile power supplies, would drive the demand was badly hit by the fall in cobalt prices. In anticipation of for batteries. This would support demand for lithium cobalt stable cobalt price outlook, we expect CMoC’s earnings to oxide as well as NCM ternary material, which is estimated to maintain stable margins towards 2020. Despite CMoC’s share expand this segment’s share of total battery market to low price has fallen to its pre-acquisition of TFM level, current double digits level from c.9% in 2018.
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