20141008-光大证券-Light_at_the_End_of_the_Tunnel_13页_200kb

MCC (1618 HK) Company Report Summary

Core Content

Metallurgical Corporation Of China (MCC), listed on the Hong Kong Stock Exchange with the ticker 1618 HK, is the world's largest metallurgical engineering and construction (E&C) contractor and one of the largest E&C conglomerates globally. The company operates in four main business segments: E&C, equipment manufacturing, resources development, and property development. It has a long operating history in China and is a major player in non-ferrous metallurgy engineering.

Main Revenue Streams

• Engineering and Construction (E&C): MCC's core business, contributing 82.7% of total revenue in 1H14. The company has been expanding into non-metallurgical E&C services, including housing construction and transportation infrastructure.
• Resources Development: MCC is involved in overseas mining and processing projects, particularly in iron, copper, nickel, and polysilicon. It has six such projects in Asia, the Middle East, and Oceania.
• Equipment Manufacturing: A secondary revenue stream, though not as dominant as E&C.
• Property Development: Another business segment, though not the primary focus.

Key Performance Highlights

• Revenue Growth: Expected to grow at a CAGR of 7% from 2013 to 2016, supported by diversification and new resource projects coming online.
• Operating Profit Growth: Projected to grow at a CAGR of 22% for the same period, driven by improved operating efficiency and reduced impairment losses.
• Net Profit Growth: Anticipated to grow at a CAGR of 29%, with the effective tax rate expected to normalize.
• EPS Growth: From Rmb0.16 in 2013 to Rmb0.29 in 2015E, showing consistent improvement.

Valuation and Investment Outlook

• Target Price: HK$2.60, based on a 7x FY15E P/E ratio.
• Upside Potential: 16.59% from the current share price of HK$2.22.
• Buy Rating: Initiated with a Buy rating due to improving fundamentals and the potential for the Shanghai-Hong Kong Stock Connect to narrow A-H share price differentials.
• H-Share Discount: The H-shares trade at a 32% discount to A-shares, making it a potential beneficiary of the Stock Connect.

Diversification and Strategic Adjustments

• Non-Metallurgical Expansion: The company expanded into non-metallurgical E&C, leading to a 118.1% YoY increase in new non-metallurgical orders in 1H14.
• Restructuring: Underperforming assets were divested, and the company focused on quality projects, avoiding long payment terms.
• Positive E&C Growth: Despite the metallurgical industry downturn, E&C revenue grew by 6.8% YoY in 1H14.

Resources Sector Development

• Projects: Six overseas resource projects in Pakistan, Argentina, Papua New Guinea, Afghanistan, and Australia.
• Revenue Growth: Resources development revenue surged by 42.2% YoY in 1H14.
• Profitability: The segment transitioned from a net loss of Rmb1.41bn in 1H13 to Rmb550m in 1H14, showing improvement.
• Future Outlook: Expected to contribute positively to the bottom line from next year as more projects start production and commodity prices stabilize.

Risk Factors

• Weak Metallurgy Investment: Continued weak investment in the domestic metallurgy sector.
• Government Policy Impact: Transportation infrastructure investment is sensitive to government policy changes.
• Raw Material Price Fluctuations: Potential for reduced profitability due to rising raw material prices.
• Commodity Price Volatility: Risk of extended break-even periods if commodity prices decline.
• Geopolitical Risks: Overseas projects face exposure to geopolitical instability.
• Legal Claims: Potential claims from CITIC Pacific on the Western Australian iron ore project.

Financial Metrics

Revenue (Rmb m)

• 2012: 221,120
• 2013: 202,690
• 2014E: 211,568
• 2015E: 227,037
• 2016E: 244,815

Net Profit (Rmb m)

• 2012: (6,943)
• 2013: 2,981
• 2014E: 3,828
• 2015E: 5,630
• 2016E: 6,509

EPS (Rmb)

• 2012: (0.36)
• 2013: 0.16
• 2014E: 0.20
• 2015E: 0.29
• 2016E: 0.34

P/E Ratio

• 2014: 11.3
• 2015E: 8.8
• 2016E: 6.0

P/B Ratio (FY14E)

• 0.70

Net Debt/Equity (FY13)

• 213.09%

Peer Comparison

Key Figures and Trends

• New Contracts: Rmb178.28bn in 1H14, with non-metallurgical contracts growing 118.1% YoY.
• Operating Efficiency: Improved in 1H14, with sales, management, and financial expenses declining.
• Debt Restructuring: The company issued USD-denominated bonds, reducing financing costs.
• Dividend: No interim dividend was declared in 1H14, but DPS increased from 0.0 to 6.1 in 2013.

Conclusion

MCC is positioned to benefit from diversification into non-metallurgical E&C and the development of its overseas resources projects. Its H-shares are undervalued compared to A-shares, and the company's improving fundamentals and strategic adjustments support a Buy rating. While the metallurgical industry remains challenging, the expansion into other sectors and the potential for the Shanghai-Hong Kong Stock Connect to narrow price differentials offer promising growth prospects.