CSCI-Metals-Jiangxi Copper (358 HK)：Import curbs to support copper prices - 20171017

Import curbs to support copper prices

• Jiangxi Copper issued a positive profit alert, expecting earnings for the first three quarters to increase by at least 50% YoY, which bodes well for its earnings outlook in 2018, in our view.
• We believe China’s curbs on scrap copper imports would continue to lend support to copper prices and further boost its earnings outlook.
• We maintain our price target at HKD16.0, based on 1.0x FY17E PBR, which is at a deep discount to global peers. Maintain Buy.

China kicked off curbs on scrap copper imports earlier than expected. According to local media reports, China is already enforcing some restrictions on imports of category 7 scrap copper, and that the market generally expects the ban will come into effect from 2018. China has imported a total of c.0.75-0.9mn tons of this categories of scrap copper last year, according to SMM data. Thus, in our view, the ban will raise the consumption of copper cathode and subsequently lead to a tighter supply condition for copper.

More upside potential for copper price in 4Q17. Although when compared to the beginning of this year, the global supply of copper concentrates has eased slightly, the China Smelters Purchase Team has managed to raise their treatment and refining charges (TR/RCs) moderately for 4Q17. Nonetheless, we believe the overall market supply will remain tight relative to the past few years, given that new project launches have continued been postponed due to heavy capex requirements. According to our estimate, the incentive price to build greenfield projects would increase to around USD7,500/ton if capital costs are included as a cost component. On the production front, according to SMM data, China’s refined copper production was up 1.0% in 9M17, remaining stable for September and was up 1.6% on a yearly basis, but signs of supply constraints have emerged due to the increasingly insufficient supply of scrap copper materials. As such, we expect the copper price to remain on an uptrend this quarter.

Jiangxi Copper issued a positive profit alert, expecting 50%+ YoY earnings growth for the Jan-Sep17 period, which is basically in line with our expectation. Whilst the current copper price bolds well for sustainable robust earnings growth, the company’s healthy balance sheet should drive potential inorganic growth opportunities, in our view.

Reiterate Buy with price target HKD16.0. We believe Jiangxi Copper’s current valuation is undervalued, as it is trading at only 0.8x our FY17E PBR, which is at a deep discount to the global peers’ average, taking into consideration that its FY17E ROE has been gradually recovering since FY15. Pegging to an unchanged target multiple of 1.0x FY17E PBR, our price target of HKD16.0 represents 23.5% upside potential. Reiterate Buy.