07 August 2007 Company Report

Transcription

1 07 August 2007 Company Report Zijin Mining (2899.HK) A new star in A-share market Expected Return Rating : BUY Price (06/08/07) : HK$5.79 Target Price : HK$6.90 Expected Capital Gain : 19.2% Expected Dividend Yield : 1.7% Expected Total Return : 20.9% Investment Highlights Soon become a member in the A-share market We expect that Zijin Mining will have its A-share listing by Sept. Given its number 1 ranking in term of gold reserves among A-share peers and bigger market caps, we believe that Zijing Mining-A would become one of the core holdings for A-share funds. We value Zijin Mining-A at approximately Rmb 11.5 or 92.7% premium over its H-share counterparts. The strong perception on its A- share price movement would offer additional excitement on Zijing Mining-H share price. A-H price difference concept Currently, mainland gold stocks are trading at times 08F PER. Our targeted Zijin Mining-A share price of RMB 11.5 represents merely 58 times 08F PER which we think is conservative. Based on 40% A-H discount assumption, its H-share price should trade at about HK$6.9. Look forward to gold price rally The gold price has bounced back to USD 680/ounce. The boom in gold price has been underpinned by three critical global conditions - strong GDP growth, ample liquidity and weak USD. As these conditions still exist, we expect gold price to hit USD 700/ounce by the end of this year on higher demand. More M&A overseas Zijin Mining launched its M&A map since Under the grounds of Rmb appreciation and fund raising through A-share issuance, we expect that Zijin Mining will speed up its plan to seek for overseas expansion opportunities. Based on our DCF valuation with an aggressive capex plan ahead, Zijing Mining is valued at about HKD6.9, or 20.9% expected total return. We reiterate a BUY. Earnings Estimates Yr-end Net Profit Chg EPS Chg PER DPS Yield P/B ROE Dec (Rmb mn) (%) (Rmb) (%) (x) (Rmb) (%) (x) (%) 2005A A 1, F 2, F 2, Create Lee (852) create.lee@cash.com.hk Key Data Stock Code : 2899.HK 12-month High/Low (HK$) : 6.36/2.775 Hang Seng Index : Issued Shares (mn) : 4,005 Market Cap (HK$m) : 23,191 Average Daily Turnover (K) : 36,127 Major shareholders : Xingheng INV (32.04%) Rel. Performance - 1 month (%) - 3 months (%) - 12 months (%) : : : Chart

2 Company Profile Zijin Mining is a leading gold mining enterprise principally engaged in exploration, mining, production, refining and sales of gold and other mineral resources in PRC. The principal product of the co is gold. The co produces gold bullions of 99.99% and 99.95% purity under its own brand. As at 31 st December 2006, metal reserves of the co comprises were the followings: FY06 Controlled Metal Reserves (tonnes) Gold 455 Platinum and palladium 151 Copper 6,700,000 Zinc 2,380,000 Nickel 544,600 Lead 40,000 Molybdenum 260,000 Tin 100,000 Iron 188,000,000 Coal 300,000,000 Source: the Company In terms of gold reserve, the co ranked the first among its HK listed peers. In FY06, the co produced 49,280 kg of gold and 28,510 kg of refined gold. Turnover of the co was mainly derived from gold sales, which accounted for 68% of gross sales in FY06; The second came from the sales of copper concentrates. Thanks to the surge in copper price in FY06, the segment comprised 13.2% of the gross sales. Gold Reserve for HK Listed Co Tonnes Zijin Mining Jiangxi Copper Zhaojin Gold Lingbao Gold Sino Gold 2 Zijin Mining (2899.HK)

3 FY06 Turnover Breakdown 13% 2% 2% 3% 2% 9% 1% 68% Gold Gold concentrates Iron concentrates Copper concentrates Copper cathodes Zinc conentrates Zinc bullion others Source: the Company Top line enhancement is expected in FY07 and 08 thanks to the strong gold price. We estimate that ASP of gold will reach USD 670/ounce and USD692/ounce for FY07 and FY08 respectively. Based on this estimation, turnover will be boosted to Rmb 15,254 mn and Rmb 16,012 mn in FY07 and FY08 respectively, translating into 42.8% and 4.9% yoy growth. ASP, Gold and Gold Concentrates Gold, g Gold concentrates, g A 2005A 2006A 2007E 2008F Segment Result Turnover (Rmb 000) 2004A 2005A 2006A 2007E 2008F Gold 1,396,035 2,403,484 7,352,837 8,965,000 9,598,800 Gold concentrates 56,405 96, , , ,000 Iron concentrates 6, , , , ,000 Copper concentrates 37, ,665 1,427,068 2,277,050 2,316,600 Copper cathodes 20,383 37, , , ,372 Zinc concentrates - 12, , , ,000 Zinc bullion ,895 2,414,610 2,441,439 others 2,417 6,192 88,805 97, ,845 Zijin Mining (2899.HK) 3

4 Soon become a member in the A-share market Zijin Mining announced in February that the co proposed to issue 150 mn A shares, with face value Rmb 1.0 per share. We expect the listing process to be completed in September. There are only two gold stocks in the mainland market, namely, Zhongjin Gold ( CH) and Shandong Gold Mining ( CH). The two counters 08F PER stand at 70.9x and 50.7x respectively whereas Zijing Mining-H only trades at 29.2X. A-H price difference concept From our point of view, the valuation difference is not justified. In terms of operating scale and gold reserve, Zijing Mining is the biggest among 3 and such leading position should arouse A-share funds interest. According to our conservative estimation, we believe Zijing Mining-A should be valued at 58 times PER or Rmb 11.5 per share. We presume a 41% A/H discount gap in the counter, which is the average discount rate from Hang Seng China AH Index; Its H-share should be priced at HKD6.9 or 34.5x 08F PER PER of the China Gold Companies Zhongjin Gold Zijin Mining Shandong Gold Mining Operating and Financial figures of China Gold Companies Mkt Cap EPS PER Code Name (HKD mn) 06A 07F 08F 06A 07F 08F GPM 07F ROE 2899 HK Equity ZIJIN MINING 65, HK Equity LINGBAO GOLD 3, HK Equity ZHAOJIN MINING 11, HK Equity SINO GOLD MINING 6, NA NA CH Equity ZHONGJIN GOLD 23, CH Equity SHANDONG GOLD 17, NA, Celestial Securities estimates Look forward to gold price rally Gold price has been doing well in 1H07 thanks to the depreciation in USD. Midterm outlook on gold price is still promising benefited from seasonally higher demand in Q3. Under the sub-prime crisis and possible rate cut in the US, the trend of USD depreciation will remain intact and thus we forecast gold price to hit USD700/ounce by the end of this year. 4 Zijin Mining (2899.HK)

5 US Gold Price, Spot Jan/07 Feb/07 Mar/07 Apr/07 0 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 May/07 Jun/07 Jul/07 Aug/07 SH Gold Price, Au 9999 and Au 9995 SHGF9995 CMDTY SHGF9999 CMDTY USD / ounce Oct-02 Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Apr-07 JPY / USD Feb-07 Feb-07 Mar-07 Mar-07 Apr-07 Apr-07 May-07 May-07 Jun-07 Jun-07 Zijin Mining (2899.HK) 5

6 In addition, the volatility in the globe equities markets will diverse funds to alternative investment vehicles. Gold, being a shelter for fund, will definitely benefit the most. World Demand and Supply for Gold Supply and Demand Change Tonnes 2004A 2005A 2006A 2005A 2006A Gold mine production % -2.2% Hedging volume by producer By producers % -15.3% Sales by authorities % -51.5% Replenish level % 20.4% Total supply % -13.3% Jewellery % -16.3% Industrial and dental % 6.8% Gold ingot and coines % -2.9% Other retails % 16.7% ETF and smiliar investment % 27.4% Total demand % -10.0% Balance Gold price Source: World Gold Council Diversified product mix Besides gold, the co also processes business segment of non-ferrous metals like zinc and copper. We forecast that another price rally in non-ferrous metals will take place in 2H07 due to the running down of inventories across the globe. As we noticed from the LME copper price, the figure has already shown a rebound in 2Q07, which was positive to the co. The diversified product mix allows Zijin Mining to enjoy rally not only in gold price, but also other metals. On the other hand, the stable FAI growth at around 25% yoy in China will definitely push the demand across the globe. Together with the resources tax, the price of copper in China will be further enhanced. FY06 Turnover 13% 2% 2% 3% 2% 9% 1% 68% Gold Gold concentrates Iron concentrates Copper concentrates Copper cathodes Zinc conentrates Zinc bullion others Source: the Company 6 Zijin Mining (2899.HK)

7 LME Copper Price LME Copper Price LME copper price USD / ton LME copper inventory Tonne Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 USD / tonne Feb-07 Mar-07 Apr-07 May-07 Jun-07 Source: the Company Possible M&A overseas Under the appreciation of Rmb, metals mining companies seek for overseas expansion. Zijin Mining has been doing M&A throughout 1H07, and we foresee that after the listing of A share, the co will be able to raise adequate fund for further acquisitions. We expect that with 20% discount to H share price, fund raised by A share listing will be around Rmb 7 9 bn. The aggressive plan of Zijin Mining will be another booster for the share price apart from A share listing. We believe the co will acquire non-gold foreign assets in 2H07 so as to build the metals kingdom of the Zijin Group. Acquisition in FY07 Date Target Asset 2007/4/27 Monterrico Metals PLC 2007/6/27 CBML 2007/7/26 Funing Zhenglong Gold Mine CNY / USD Feb-07 Feb-07 Mar-07 Mar-07 Apr-07 Apr-07 May-07 May-07 Jun-07 Jun-07 Zijin Mining (2899.HK) 7

8 Investment opinion Currently, the gold plays in HK are trading at 14 29x 08F PER. Yet we do not perceive the 29x 08F PER of Zijin Mining as overvalued on ground of the A share listing. The mainland market lacks large-scale gold enterprise; Comparatively speaking, Zijin Mining outperforms the two stakes in current A market on its operating figures and scale. Our DCF model with discount rate 9.8% and terminal growth rate 2.5% suggests that the fair value of the stock should be around HK$6.86. With the A share listing concept, we recommend the BUY rating on Zijin Mining. Our target price on the counter is HK$6.9, revealing 34.5x 08F PER. DCF model Rmb m 2006A 2007F 2008F 2009F 2010F 2011F 2012F EBITDA 3,229 4,741 5,024 5,687 6,438 7,288 8,250 Add: Working capital adjustment 365 1,052 2,524 1,656 1,288 1,458 1,650 Less: Capital expenditure (1,500) (1,100) (739) (805) (875) (949) Less: Income tax paid (ungeared) (511) (743) (781) (938) (1,062) (1,202) (1,361) Free cash flow 3,083 3,549 5,667 5,666 5,858 6,668 7, ,568 yoy growth Discount factor Present value 3,549 5,161 4,700 4,426 4,588 4,756 60,815 Sum of discounted NCF 87,995 Assumption Fair enterprise value Discount rate 9.8% Terminal Growth rate 2.5% Add: Cash and equivalents 1,940 Less: Market value of debt (4,058) Less: Minority interest 654 Fair equity value Number of issued shares 13,141 Fair equity value per share Fair equity value per share Zijin Mining (2899.HK)

9 Key Financial Summary 2005A 2006A 2007F 2008F Profit & Loss (Rmb mn) Turnover 3,036 10,679 15,255 16,013 COGS (1,563) (6,719) (9,565) (10,040) GP 1,473 3,960 5,690 5,973 SG&A (311) (561) (801) (841) Other operating expense (51) (493) (705) (740) EBITDA 1,290 3,229 4,741 5,024 Dep & Amor EBIT 1,110 2,906 4,184 4,392 Associates Interest Inc / expense (8) (101) (101) (101) EBT 1,134 2,869 4,176 4,389 Tax (264) (511) (743) (781) MI (166) (654) (952) (1,000) NP 704 1,705 2,481 2,607 EPS DPS Dividend ,303 1,369 Balance Sheet (Rmb mn) Cash & eq 1,030 1,940 2,405 3,274 AR Inventories ,103 2,208 Other current assets Total current assets 1,675 3,679 5,391 6,378 Net PP&E 2,395 4,356 5,358 5,884 Net intangibles ,010 Total investments 458 1,042 1,600 2,200 Other LT assets 417 1,386 1,386 1,786 Total non -current asset 3,800 7,670 9,264 10,880 Total assets 5,475 11,349 14,655 17,259 AP 627 1,545 2,200 2,309 ST debt 631 1,449 2,103 2,213 Other current liab Total current liab 1,494 3,495 4,523 4,722 LT debt 655 2,609 2,765 2,931 other long term liab Total non current lib 803 2,801 2,949 3,115 Total liab 2,297 6,296 7,473 7,837 Capital and reserves 2,371 3,652 4,830 6,068 MI 808 1,401 2,353 3,354 Total equity 3,179 5,053 7,183 9,422 Cash Flow (Rmb mn) NP 704 1,705 2,481 2,607 MI ,000 Dep & Amort Change in NWC (23) (178) (592) (9) Others CFO 1,128 2,606 3,507 4,340 Capex (1,067) (1,802) (1,300) (1,100) Others (689) (1,813) (1,251) (1,251) CFI (1,757) (3,615) (2,551) (2,351) Debt raised 957 2, Equity raised Div paid (264) (822) (1,303) (1,369) Interest paid (42) (145) (210) (231) Others CFF 809 1,946 (501) (1,124) Net CF FOREX adjust Cash beginning 826 1,006 1,947 2,405 Cash ending 1,006 1,947 2,405 3,274 Zijin Mining (2899.HK) 9

10 Key Ratios 2005A 2006A 2007F 2008F Efficiency AR turnover Inv turnover (5) (7) (5) (5) AP turnover (2) (4) (4) (4) Cash conversion cycle (67) (26) 3 3 Liquidity Net debt to equity 11% 58% 51% 31% Current ratio 112% 105% 119% 135% Quick ratio 74% 61% 59% 75% Cash ratio 69% 56% 53% 69% Profitability ROA 12.9% 15.0% 16.9% 15.1% ROE 29.7% 46.7% 51.4% 43.0% Gross margin 48.5% 37.1% 37.3% 37.3% Net margin 23.2% 16.0% 16.3% 16.3% Valuation BVPS PB EPS PER PEG Growth momentum Turnover growth % % 42.85% 4.97% COGS % % 42.36% 4.97% GP growth 78.66% % 43.69% 4.97% NP growth 68.49% % 45.54% 5.09% EPS growth 68.49% 21.12% 16.44% 5.09% EBITDA 74.57% % 46.84% 5.98% 10 Zijin Mining (2899.HK)

11 Historical Weekly PER Pe Ratio Mean +1SD -1SD /04/04 04/04/04 07/04/04 10/04/04 01/04/05 04/04/05 07/04/05 10/04/05 01/04/06 04/04/06 07/04/06 10/04/06 01/04/07 04/04/07 07/04/07 Historical Weekly P/B Ratio Px To Book Ratio Mean +1SD -1SD /26/03 3/26/04 6/26/04 9/26/04 12/26/04 3/26/05 6/26/05 9/26/05 12/26/05 3/26/06 6/26/06 9/26/06 12/26/06 3/26/07 6/26/07 Zijin Mining (2899.HK) 11

12 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. 12 Zijin Mining (2899.HK)