02 January 2008 Company Report

Transcription

1 02 January 2008 Company Report Zhaojin Mining (1818.HK) Pure Gold concept Expected Return Rating : BUY Price (31/12/07) : HK$32.6 Target Price : HK$40.5 Expected Capital Gain : 24.2% Expected Dividend Yield : 1.2% Expected Total Return : 25.4% Investment Highlights Pure Gold play Zhaojin is a pure gold play in the field. More than 94.9% of Zhaojin Mining turnover was derived from gold sales and the co operates its own smelting segment, which is different from the two other locally listed peers Lingbao Gold and Zijin Mining, for which gold sales accounted for 75.9% and 58.5% of the 1H07 turnover respectively. The pure gold concept allows the co to benefit most from the rally in gold price in FY08. Gold price rocket in FY08 We believe the US dollar will keep its downward trend and thus providing upside for gold price as people are switching from USD asset like bonds and equities to commodities. Jewelry demand for gold in China is accelerating. We believe, under the booming China economy and the thriving A share market, gold demand from China will be the key growth driver for world gold demand in FY08. Undervalued integrated gold miner Zhaojin is now trading at 38.5x 08F PER, which is trading at 7.5% discount to the leader Zijin Mining. We expect this discount to be narrowed in 1H08 as the premium on Zijin is solely derived from the A share floatation. And we believe Zhaojin deserves a premium over other peers under its pure gold concept, higher margin and aggressive M&A plan. Aggressive M&A in FY08 Under the strong RMB and the cost pressure, China miner commenced a new round of M&A overseas. Leaders like Chalco, Zijin, JXC, HNC expanded their foothold over the globe; we believe Zhaojin Mining will follow suit in FY08 in response to the need of replacing the old exhausting mines with new mines so as to lower the average life. Earnings Estimates Yrend Net Profit Chg EPS Chg PER DPS Yield P/B ROE Dec (Rmb mn) (%) (Rmb) (%) (x) (Rmb) (%) (x) (%) 2005A 163 (1.6) A F F F Create Lee (852) create.lee@cash.com.hk Key Data Stock Code : 1818.HK 12month High/Low (HK$) : 44.90/11.40 Hang Seng Index : Issued Shares (mn) : 219 Market Cap (HK$m) : 7,115 Average Daily Turnover (K) : 2,756 Major shareholders : Zhaojin Group (37.3%) Rel. Performance 1 month (%) 3 months (%) 12 months (%) : : : Chart

2 Company Profile Zhaojin Mining is one of the leading integrated gold enterprises with exploration, mining, ore processing and smelting operations based mainly in Zhaoyuan district of Shandong province. Gold Reserve for HK Listed Co (FY06) Tonnes Zijin Mining Jiangxi Copper Zhaojin Gold Lingbao Gold Source: the Company The co is a pure gold play in the market; approximately 94.9% sales were derived from gold sales in FY06 for the co; whereas for two others locally listed peers: Zijin Mining (2899.HK) and Lingbao Gold (3330.HK), of which gold sales accounted for 70.4% and 72.7% respectively. Turnover composition, Zhaojin Mining, FY06 Gold 94% 1% 1% 4% 1% 3% Silver Sulphur Other byproducts Processing gold and silver Source: the Company The co possesses 4,196 koz gold reserves in FY06, which ranked 3 rd around the local listed peers (1 st : Zijin Mining (2899.HK); 2 nd : Jiangxi Copper (0358.HK)). Gold production of Zhaojin in FY06 was koz, showing a CAGR growth of 10.5% in FY03 FY06. 2 Zhaojin Mining (1818.HK)

3 Gold Production Mining Segment koz A 2004A 2005A 2006A 2007F 2008F 2009F The co currently operates 5 mines, namely Jinchiling Gold Mine, Hedong Gold Mine, Xiadian Gold Mine, Dayingzhuang Gold Mine, Jintingling Gold Mine. The life of the mines ranged from 2.9 years to 28.1 years (1H07). Gold Mine, Zhaojin Mining Gold Reserves Open pit / underground Interest Gold Grade Gold Cotent (kgs) Jinchiling Gold Mine Underground 100% , Hedong Gold Mine Underground 100% , Xiadian Gold Mine Underground 100% , Dayingzhuang Gold Mine Underground 100% , Jintingling Gold Mine Underground 75% , Total ,497 Total (to the co) ,527 Source: the Company Years to sustains (30/6/2006) Zhaojin Mining (1818.HK) 3

4 Pure Gold play Zhaojin is a pure gold play in the field. More than 94.9% of Zhaojin Mining turnover was derived from gold sales and the co operates its own smelting segment, which is different from the two other locally listed peers Lingbao Gold and Zijin Mining, for which gold sales accounted for 75.9% and 58.5% of the 1H07 turnover respectively. Turnover distruibution, Zijin and Lingbao Zijin Mining Lingbao Gold 22% 2% 3% 1% 1% 58% Gold Copper concentrates Copper Cathodes Zinc Ingots Zinc Concentrates Iron Concentrates 2% 20% 2% Gold Bullion Silver Copper Products Sulphuric acid 13% Others 76% Source: the Company In the wake of the listing of Zhaojin Mining in late FY06, noticed from the historical PER of the co, we found that the performance of the stock is highly correlated with the spot price of gold in COMEX, with correlation coefficient Our FY08 and longterm gold price assumption at USD 850 / ounce and USD 750 / ounce implies 22% and 8% premium to FY07 average price. We believe the co will enjoy a better valuation in FY08 under further gold price rally. Our target price implies 47.8x and 40.6x forward PER in FY08 and FY09 respectively. Gold Price VS PER, Zhaojin Mining Histroical PER Range (Weekly) Spot price /12/2006 5/1/ /1/ /2/2007 9/3/ /3/ /4/ /5/2007 1/6/ /6/ /7/2007 3/8/ /8/ /9/2007 5/10/ /10/ /11/2007 7/12/2007 Source: Bloomberg 4 Zhaojin Mining (1818.HK)

5 Gold price rocket in FY08 We are bullish on the gold price in FY08 due to: 1. Weak USD 2. Increasing demand on jewelry Weak USD USD index has been a good indicator for gold price historically; in the past ten years, the correlation coefficient between the two data was 0.80, meaning that the USD index is highly negatively correlated to the spot gold price. We noted that USD index has been decreasing since 2001, the year that 911 incident took place. The index plunged from to around 70 recently. At the same time, gold price rocketed from USD 320 / ounce to USD 840 / ounce recently. USD Index vs Gold Price Spot GOLDS Comdty Px Last DXY Curncy /2/ /9/ /4/ /11/1999 9/6/2000 5/1/2001 3/8/2001 1/3/ /9/ /4/ /11/ /6/ /1/ /8/ /3/2006 6/10/2006 4/5/ /11/2007 Source: Bloomberg Federal Reserve has cut the federal fund rate from 5.25% early this year to 4.25% in Dec. As we noted from the period in late 2000 to mid 2004, Fed cuts the target rate from 6.5% to 1%, which was a 5.5 ppt cut; at the same time, the USD index plunged from to the lowest 85.11, showing a 28.9% drop. We believe the bottom line for the target rate should be 1%, which means that there is 3.25ppt room for the Fed to further reduce the rate. As the only weapon of the US government to remedy the deteriorating economy, we perceive the rate cut will continue in FY08, thus being bullish on FY08 gold price. USD Index vs Federal Target Rate USD Index Federal Target Rate /4/1998 6/11/ /5/1999 3/12/ /6/ /12/ /7/ /1/2002 9/8/ /2/2003 5/9/ /3/2004 1/10/ /4/ /10/ /5/ /11/2006 8/6/ /12/2007 % Source: Bloomberg Zhaojin Mining (1818.HK) 5

6 Increasing demand for gold Despite the skyrocketed gold price in 2H07, demand for gold on jewelry is still on the up trend in China. We found that jewelry demand for gold in China is accelerating, the yoy growth in first three quarters in FY07 was well above 20%. We believe, under the booming China economy and the thriving A share market, gold demand in China will be the key growth driver for world gold demand in FY08. China Jewelry Demand, Quarterly China Jwelry Demand yoy growth 35% 30% 25% 20% 15% 10% 10% 5% 0% 5% 15% 20% /9/ /3/ /9/ /3/2003 metric ton 30/9/ /3/ /9/ /3/ /9/ /3/ /9/ /3/ /9/2007 Source: GFMS World Gold Demand metric ton 4,000 3,500 3,000 2,500 2,000 1,500 1, % yoy Q06 13Q07 ETFs & similar Other Bar & coin Industrial & dental Jewellery Source: GFMS 6 Zhaojin Mining (1818.HK)

7 A Share Market Performance SH Composite Index SZ Composite Index 6,000 5,000 4,000 3,000 2,000 1,000 28/2/ /5/ /8/2003 7/11/ /1/ /4/ /7/2004 8/10/ /12/ /3/ /6/2005 9/9/2005 2/12/ /2/ /5/ /8/2006 3/11/ /1/ /4/ /7/2007 5/10/ /12/2007 Source: Bloomberg Nominal GDP of China 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 31/3/ /9/ /3/ /9/ /3/ /9/ /3/ /9/ /3/ /9/ /3/ /9/ /3/ /9/ /3/ /9/ /3/ /9/ /3/ /9/2007 Source: Bloomberg Zhaojin Mining (1818.HK) 7

8 Undervalued integrated gold miner Zhaojin Mining differs from the other locally listed gold stocks by the concept of pure gold manufacturer. Together with our FY08 and terminal gold price assumption at USD 850 / ounce and USD 750 / ounce respectively, our DCF model with 13.4% WACC and 2.2% terminal growth rate suggests that the 1.4x DCF value of Zhaojin is HK$40.5. Zhaojin is now trading at 38.5x 08F PER, which is trading at 7.5% discount to the leader Zijin Mining. Yet, we expect the discount to be narrowed or eliminated in FY08 as the current premium due merely to the A share floatation of Zijin Minig. We think Zhaojin Mining deserves a premium over other peers under its pure gold concept, higher gross margin, aggressive expansion plan and the possible A share floatation. ASP and Gross Margin, Zhaojin Mining ASP, Rmb / gram Margin A 2004A 2005A 2006A 2007F 2008F 2009F 200.0% 150.0% 100.0% 50.0% 0.0% Gold Stocks 08F PER HK Equity CH Equity CH Equity 2899 HK Equity 3330 HK Equity Average Source: Bloomberg, Celestial Securities estimates 8 Zhaojin Mining (1818.HK)

9 DCF model, Zhaojin Mining Rmb mn F 2008F 2009F 2010F 2011F 2012F EBITDA ,104 1,295 1,231 1,169 1,111 Add: Working capital adjustment 2,509 2,750 3,300 2,145 1,590 1,093 Less: Capital expenditure (268) (350) (470) (450) (349) (297) (245) Less: Income tax paid (ungeared) (168) (234) (302) (356) (336) (320) (304) Free cashflow 161 2,792 3,082 3,790 2,691 2,142 1,654 16,744 yoy growth % 10.4% 23.0% 29.0% 20.4% 22.8% Discount factor Present value Sum of discounted NCF Terminal value Fair enterprise value Add: Cash and equivalents Less: Market value of debt Less: Minority interest Fair equity value Number of issued shares, mn Fair equity value per share 30.6 P/DCF Multiplier 1.4 Fair equity value per share, HKD 40.5 Gold Stocks Comparison Bloomberg Company Mkt Cap, mn GPM, % PER ROE PBR Ticker FY07 FY08 FY09 FY07 FY08 FY09 FY07 FY08 FY HK ZHAOJIN MINING 23, Equity INDUSTRY H 2899 HK ZIJIN MINING GROUP CO 136, Equity LTDH 3330 HK 3, Equity LINGBAO GOLD CO LTDH CH Equity ZHONGJIN GOLD CORPA 34, N.A CH SHANDONG GOLD MINING 28, N.A. N.A. N.A. N.A Equity CO LTA Source: Bloomberg, Celestial Securities estimates Zhaojin Mining (1818.HK) 9

10 Aggressive M&A in FY08 Under the strong RMB and the cost pressure, China miner commenced a new round of M&A overseas. Leaders like Chalco, Zijin, JXC, HNC expanded their foothold over the globe; we believe Zhaojin Mining will follow suit in FY08 in response to the need of replacing the old exhausting mines with new mines so as to lower the average life. USD RMB Exchange Rate /1/2005 4/3/ /4/ /6/ /7/ /9/2005 4/11/ /12/ /2/ /3/ /5/2006 7/7/ /8/ /10/2006 1/12/ /1/2007 9/3/ /4/ /6/2007 3/8/ /9/2007 9/11/ /12/2007 Source: Bloomberg Gold Mine Acquired in 2H07 Possible boost to production Reserves, kg * Average Life Estimated annual production, kg Xixia Tuoli 3, Gansu Tianhao 3, Sarekuobu 1, Fukang Mining Industry 1, kg 16 koz * Average life of current mine of Zhaojin Mining Zhaojin acquired 5 mining assets in 2H07, namely Xixia Zhaojin, Tuoli Zhaojin, Gansu Tianhao, Sarekuobu Gold Mine and Fukang Mining Industry. With the assumption of mining life of 22 years, which is the current average life of existing gold mine of Zhaojin Mining, we expect the new mines will add 15.7koz and 16.1 koz in FY08 and FY09 gold production respectively to Zhaojin. This will boost the production by 6.6% and 5.7% in FY08 and FY09 respectively. 10 Zhaojin Mining (1818.HK)

11 Gold Mines Production, Zhaojin Mining CAGR 114% 2003A 2004A 2005A 2006A 2007F 2008F 2009F Potential adding from new mine Jintingling Gold Mine Dayingzhuang Gold Mine Xiadian Gold Mine Hedong Gold Mine Jinchiling Gold Mine M&A of Zhaojin has a good track record. We noted that gold mines acquired by Zhaojin are improving the overall grading of the co. We noted that new mines like the mines from Gansu Zhaojin and Fukang Mining Industry have higher grading (5 g/ton and 8 g/ton respectively) than the 5 mines that Zhaojin operates. We expect with the expertise of the management on the M&A of gold mines, Zhaojin will utilize the M&A strategy to improve the gold grade. We believe after the fund raised from the IPO of Zhaojin Hshare of HK$2,400 mn, the co is able to do further M&A in FY08. Cash and Cash Per Share, Zhaojin Mining Cash ending Cash per share 3,500 3,000 2,500 2,000 1,500 1, A 2005A 2006A 2007F 2008F 2009F Zhaojin Mining (1818.HK) 11

12 Investment Opinion Zhojin Mining is our top pick for the gold miners; we recommend BUY on this stock. We like the pure gold concept of Zhaojin such that the co can capture the largest gain among other listed peers in the gold price rally. Zhaojin is now trading at 38.5x 08F PER, which is trading at 7.5% discount to the leader Zijin Mining. Yet, we expect the discount to be narrowed or eliminated in FY08 as the current premium due merely to the A share floatation of Zijin Minig. We think Zhaojin Mining deserve a premium over other peers under its pure gold concept, higher gross margin, aggressive expansion plan. Furthermore, we are looking for A share floatation for Zhaojin Mining, which is one of the leading gold miners in China in a foreseeable future, which will be a potential booster to the share price. Our DCF derived target price is HK$40.5, which accounted for the production addition from new mines and the RMB appreciation. Our target price implies 47.8x and 40.6x forward PER in FY08 and FY09 respectively. 12 Zhaojin Mining (1818.HK)

13 Key Financial Summary Yrend Dec 2004A 2005A 2006A 2007F 2008F 2009F P&L (Rmb mn) Turnover ,164 1,586 1,997 2,319 COGS GP ,164 1,363 SG&A Other operating expense EBITDA ,104 1,295 Dep & Amor EBIT ,069 Associates Interest Inc / expense IPO interest 89 EBT ,078 Tax MI Deferred Tax 99 NP Dividend EPS (preexceptional item, Rmb) EPS (in. exceptional item, Rmb) DPS (Rmb) Balance Sheet (Rmb mn) Cash & eq ,695 2,664 2,837 3,321 AR Inventories Other current assets Total current assets ,022 3,403 3,743 4,361 Net PP&E 295 1,022 1,178 1,575 1,969 2,163 Net intangibles ,051 Total investments Other LT assets Total non current asset 465 1,792 1,885 2,409 3,028 3,477 Total assets 1,025 2,133 4,908 5,813 6,771 7,838 AP ST debt Other current liab Total currnet liab ,061 LT debt other long term liab Total non current lib Total liab 413 1,328 1,443 1,622 1,702 1,729 Capital and reserves ,408 4,101 5,007 6,045 MI Total equity ,464 4,160 5,068 6,109 Cash Flow (Rmb mn) EBIT ,069 Dep & Amort Change in NWC 21 (4) 31 (262) (15) (12) Others (14) (26) (88) (51) (20) (8) CFO ,069 1,276 Capex (135) (258) (268) (350) (470) (450) Others (118) (400) 23 (100) (50) 80 CFI (252) (658) (245) (450) (520) (370) Debt raised (93) 125 (50) (50) Equity raised 362 2,367 Div paid (7) (29) (58) (215) (277) (326) Interest paid (4) (44) 45 (46) (48) (46) Others CFF ,261 (137) (375) (422) Net CF 343 (211) 2,557 (32) Cash beginning ,696 2,664 2,837 Cash ending ,696 2,664 2,837 3,321 Zhaojin Mining (1818.HK) 13

14 Key Ratios 2004A 2005A 2006A 2007F 2008F 2009F Efficiency AR turnover Inv turnover (1.8) (1.3) (1.0) (1.0) (1.0) (1.0) AP turnover (1.8) (1.3) (1.0) (1.0) (1.0) (1.0) Cash conversion cycle Lquidity Net debt (106.6) (1,962.2) (1,805.9) (2,029.6) (2,562.8) Net debt to equity 17.4% 92.1% 57.6% 44.0% 40.5% 42.4% Current ratio 147.7% 56.0% 454.5% 380.5% 377.0% 410.9% Quick ratio 127.9% 30.7% 413.1% 305.6% 294.7% 322.4% Cash ratio 92.2% 22.7% 405.4% 297.8% 285.8% 312.8% Profitablity ROA 16.2% 7.6% 7.2% 8.2% 9.1% 9.3% ROE 27.0% 20.2% 10.1% 11.5% 12.2% 11.9% Gross margin 44.6% 50.6% 53.5% 57.0% 58.3% 58.8% Net margin 38.7% 18.8% 30.2% 30.1% 30.8% 31.3% Valuation BVPS PB EPS PER PEG 0.9 (65.0) Growth momentum Turnover growth 11.5% 102.7% 34.2% 36.2% 25.9% 16.1% COGS 0.3% 80.6% 26.4% 26.1% 22.0% 14.9% GP growth 30.7% 130.2% 41.8% 45.0% 28.9% 17.0% NP growth 264.2% 1.6% 115.6% 36.1% 28.9% 17.7% EPS growth 12.5% 121.4% 74.2% 21.5% 28.9% 17.7% EBITDA 30.8% 180.7% 61.7% 45.3% 27.3% 17.3% Historical Weekly PER Pe Ratio Mean +1SD 1SD /1/ /1/ /2/2007 9/3/ /3/ /4/ /5/2007 1/6/ /6/ /7/2007 3/8/ /8/ /9/2007 5/10/ /10/ /11/2007 7/12/ /12/2007 Source: Bloomberg 14 Zhaojin Mining (1818.HK)

15 Historical Weekly P/B Ratio Px To Book Ratio Mean +1SD 1SD /1/ /2/2007 9/3/ /3/ /4/ /5/2007 1/6/ /6/ /7/2007 3/8/ /8/ /9/2007 5/10/ /10/ /11/2007 7/12/ /12/2007 Source: Bloomberg Zhaojin Mining (1818.HK) 15

16 Our Rating System Stock Buy Accumulate Hold Reduce Sell Expected to outperform the benchmark index by >15% over the next six months Expected to outperform the benchmark index by 5 15 % over the next six moths Expected to outperform or underperform the benchmark index by <5% over the six months Expected to underperform the benchmark index by 5 15% over the next six months Expected to underperform the benchmark index by >15% over the next six months Industry Outperform Fundamentals/valuations of most stocks in the sector are expected to be improving over the next six months. Marketperform Fundamentals/valuations of most stocks in the sector are expected to be steady, neither improving nor deteriorating, over the next six months. Underperform Fundamentals/valuations of most stocks in the sector are expected to be deteriorating over the next six months. Selective Fundamentals/valuations of the stocks in the sector are expected to be diverging over the next six months. Head Office: 21/F, Low Block, Grand Millennium Plaza, 181 Queen s Road Central, Hong Kong. Tel: (852) Fax: (852) The above information is provided and distributed by Celestial Securities Limited ( CSL ). CSL is a licensed corporation under the Securities and Futures Ordinance. The document is for information purpose only. Neither the information nor opinion expressed shall be construed, expressly or impliedly, as an advice, offer, invitation, advertisement, inducement, recommendation or representation of any kind or form whatsoever. While the information contained herein has been obtained from sources believed to be reliable, CSL or its affiliates ( CASH ) do not represent that it is accurate or complete and it should be relied upon. CASH hereby expressly disclaims all liabilities arising out of or incidental to the accuracy and completeness of the contents and information herein contained. The contents and information in this document will be subject to change without further notice. Trade in securities covered by this report may be made only in those jurisdictions where the securities are qualified for trading. This document may not in whole or in part be reproduced or furnished to any person other than the addressee. 16 Zhaojin Mining (1818.HK)