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CSCI-Metals-Zijin Mining (2899 HK)：Positive profit alert to drive further re-rating - 20180125

Positive profit alert to drive further re-rating

• The company’s latest positive profit alert for FY17E suggests that its earnings results, though in-line with our expectation, are likely to surprise the street on the upside. Based on the company’s latest guidance, we have revised up our revenue and net profit estimates by 2.2% and 12.3% for FY18E respectively.
• The company’s share price has increased 31% since last Dec and exceeded our previous target price. On anticipation that Zijin would ride on the metal commodities price rally this year, we have revised up our price target to HKD4.3, based on 2.0x (prior 1.7x) FY18E PBR, which looks undemanding given our estimated ROE of 11.0% this year versus only 6.0% in FY15.
• In our view, a continued upward trend in the gold price and further discovery of new resources would be the major catalysts in driving for potential re-rating of its valuation going forward.

Solid production growth momentum intact. As mentioned in our update note dated 4 Dec, management is confident that the company’s three-legged growth strategy will pay off. For Copper, in order to tap into the expected growing market shortage, the company plans to further ramp up the capacity of its Kolwezi Copper Mine in DR Congo; whilst the Kamoa Copper project will be the primary mid-term growth driver from 2020 onwards. For gold, the company is seeking M&A opportunities so as to replenish gold resources following earlier depletion at its Zijinshan Gold mine. Meanwhile, for zinc, the company foresees that it would benefit from the zinc price uptrend would be sustainable in the coming two years.

A weak dollar outlook in favor of metals prices. Benefiting from the weak dollar performance, gold prices have led metals commodity prices on the uptrend since the beginning of the year. Meanwhile, we expect precious metals prices would be supported on an uptrend as investors sought insurance against possible inflation and geographical uncertainty, and a gradually improving global economy would continue to favour global consumption of industrial metals.

Positive profit alert suggests a strong beat for FY17 results. Based on the preliminary data, the company estimates that the net profit attributable to the shareholders will increase by RMB1.57-1.75bn for the year ended 2017, representing an increase of 85-95% from a year ago. Accordingly, we have revised up our revenue and net profit estimates by 2.2% and 12.3% for FY18E respectively.

Undemanding valuation. Zijin is currently trading at 1.74x FY18E PBR, which we believe is undemanding considering the improving ROE, attractive dividend yield at an estimated of 2.9% for FY18E, as well as its cobalt production being a potential re-rating catalyst. Accordingly, we have revised up our price target to HKD4.3, based on 2.0x FY18E PBR, or +2SD above its 5-yr historical average. Maintain BUY.