Morningstar | Jiangxi Copper's 1Q Results Beat Expectations; Long-Term Bearish Outlook Unchanged
No-moat Jiangxi Copper reported first-quarter net profit of CNY 742 million, down 3% year over year. Stripping out one-off items of CNY 102 million, earnings were above our expectations and accounted for 32% of our full-year forecast. Nonetheless, we are keeping our fair value estimate of HKD 9.50 (CNY 8.20) unchanged as we expect copper prices to weaken. Our bearish long-term outlook is intact and we have made no changes to our midcycle commodity price forecasts. In our view, the H shares are fairly valued while the A shares are overvalued.Given the lack of operating statistics in the first-quarter results, we can’t analyze the company's performance in detail. Gross margin rose to 3.6% from 2.8% a year ago despite falling copper prices. While revenue dropped 3% year over year, cost of goods sold declined at a faster pace of 4%. We suspect the improvement is due to lower contribution from the trading business, which earns a thin margin.
Jiangxi Copper's earnings are highly dependent on copper and gold, which together contributed more than 95% of the firm’s 2018 gross profit. While we don’t expect significant downside for the gold price, we think upside is also limited as we forecast a nominal gold price of $1,300 per ounce by 2020. On the other hand, our long-term copper price forecast is below consensus; we project the copper price to fall to $2.29 per pound in 2021 (versus its current price around $2.90) before a gradual recovery takes place. This is largely due to slowing Chinese demand growth on the back of decelerating fixed-asset investment growth.
Jiangxi Copper is engaged in copper mining, milling, smelting and refining for the production of copper cathodes, copper rods and wires and other related products, including pyrite concentrates, sulphuric acid, and electrolytic gold and silver, and rare metals such as molybdenum; provision of smelting and refining services. Through its subsidiaries, Co. is engaged in trading of sulphuric acid and other chemical products; production and sale of copper materials and precious metal materials, and mining equipment; overseas futures business and related enquiry services and businesses; construction and installation services; and development and sale of construction materials.
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