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Morningstar | Jiangxi Copper’s First-Half Results Trail Expectation on Higher Costs; Mitigated by Other Gains

No-moat-rated Jiangxi Copper’s, or JC’s, first-half 2018 net profit of CNY 1.33 billion, up 36% year over year, was in line with the positive profit alert announced in July, mainly attributable to higher metal prices. However, stripping out other gains and losses, including fair value changes, disposal gains, and impairment losses, the results were below our expectation due to higher-than-expected costs. We reduce our fair value estimate slightly to HKD 9.30 (CNY 8.10) from HKD 9.50 (CNY 8.20) to take into account the disappointment. We think concerns regarding a trade war between the U.S. and China will continue to pressure JC’s share price.

Despite higher metal prices, the firm's gross margin fell to 2.9% in first-half 2018 from 3.3% a year ago, mainly due to an increase in copper raw material costs. Meanwhile, production of main products such as copper cathode, copper concentrates, and gold were on track to achieve JC's 2018 full-year targets, except for production of sulphuric acids, which was ahead of schedule.

JC’s gross margin is still far below the double-digit levels seen pre-2011, and we remain bearish on the firm’s long-term prospects, given our below-consensus copper price forecasts. We forecast 2018 copper prices to average USD 3.00 per pound. Although prices averaged USD 3.14 during the first half of the year, they have fallen to about USD 2.70 as of Aug. 24. As new supply ramps up and demand growth in China continues to slow, we expect prices to fall further, and our long-term 2022 copper price forecast is at USD 2.34 per pound (in nominal terms).