KGI: Jiangxi Copper Co Ltd. (358 HK) – Breakout of copper prices
alanyeo
Buy Entry – 14.1 Target – 16.0 Stop Loss – 13.2
Jiangxi Copper Company Limited is a China-based company, principally engaged in the mining, smelting and processing of copper. The Company is also engaged in the extraction and processing of precious metals and dissipated metals, sulfur chemical industry business, and financial and trading businesses. The company’s products include cathode copper, gold, silver, sulfuric acid, copper rods, copper foils, selenium, tellurium, rhenium, bismuth and others. The Company mainly conducts its businesses within Mainland China and Hongkong.
Breakout signal has come. Copper prices have been consolidating after topping out in October 2021. The recent (core) CPI data in the US and Europe did not show any evident sign of inflation subsiding. Investors are still cautious of rising prices. Meanwhile, the ECB and Fed have pivoted to more hawkish moves to curb inflation. However, the expectation of declining liquidity has not pushed down commodity prices as the rise in prices is more attributable to supply chain issues. On 9th February, copper prices broke out in the consolidation channel. Although prices pulled back a bit, the uptrend has been formed. Moving forward, the seasonal inventory restocking in March could further drive prices higher.
Infrastructure is the only way for China to maintain economic growth amidst a soft landing. China’s GDP growth dropped further to 4% YoY in 2021, down 90bps from 2020. The slowdown is not surprising as the second largest economy had been adopting the most draconian lockdown measures to maintain its zero-covid policy. Meanwhile, the authorities have aggressively demanded the real estate sector to de-leverage and have imposed a series of regulations upon the fast-growing sectors such as education and technology. Last year, the only driver that has prevented China from tipping into recession is its exports. However, Southeast Asia countries are expected to recover quickly in 2022, regaining market share of low-end production from China. Therefore, it is inevitable to see China’s export growth slow down this year. Given the weak domestic consumption which is difficult to be pushed by administrative measures, China has to resort to the old measure, fixed asset investment. And the recent loose monetary policies have paved the way for it to push infrastructure expansion to maintain economic growth.
The updated market consensus of the EPS growth in FY22/23 is -0.87%/-8.37% YoY respectively, which translates to 7.3x/7.9x forward PE. Current PER is 7.8x. Bloomberg consensus average 12-month target price is HK$17.43.
