Earnings deterioration priced in
- Revised down FY22F/FY23F earnings after inputting lower copper and gold price projections
- Sales volume growth and higher T/C (treatment charges) to help to buffer earnings decline
- Expansion of business scope to downstream to enhance growth potential
- Reduce TPs to RMB17 for A-share and HK$15 for H-share but retain BUY call for H-shares and HOLD for A-shares
Reduce TPs on lower earnings forecasts. We reduce our TPs on A-and-H shares of Jiangxi Copper to RMB17 and HK$15 respectively, and maintain our HOLD call on A shares and BUY call on H shares. This follows our 20%/30% downward revisions to FY22F/FY23F EPS after inputting lower copper and gold price forecasts. The company should deliver strong earnings in 1H22, however, 2H22 earnings is expected to deteriorate following the dive in copper prices since June. Despite thisHowever, volume growth of copper processing products and gold/silver will help to buffer the negative impact of lower metal prices.
Expansion of business scope to downstream to enhance growth potential. The company acquired Tpco Copper and Jiangxi Cable in 2021, which has a capacity of 360kpy of wire rods and 60ktpy of drawn wire, as the part of its strategy to expand and strengthen its copper processing business. The company is planning to invest RMB12.8Bn in three separate projects over 2022-2028 in Jiangxi: i) adding capacity of 30k tonne p.a. of new copper casting materials by the end of 2026, ii) building a new copper rod plant of 220k tonne p.a. capa by the end of 2022, and iii) building a 100k tonne p.a. electfoil mill for EV batteries by 2028. This will lead to earnings growth over the mid to long term.
Excessive pullback of H-share prices, now attractively valued. Following the retreat in copper prices, the company’s H-shares have declined c 30% since mid-Apr, which is excessive vs. the 15% fall in A-shares and LME copper prices by 27 July 2022. The stock is trading at 0.4x FY22F P/BV, 6.2x PE, and 4.7x EV/EBITDA which is at the low end of its historical range.
