20181207-中国银河国际证券-山东黄金-01787.HK-Leading_PRC_Gold_Producer_with_a_Strong_Balance_Sheet_13页_795kb

Summary of Shandong Gold (1787 HK)

Core Content

Shandong Gold is a leading Chinese gold producer with a strong balance sheet and growth potential. The company is well-positioned to benefit from a positive outlook on gold prices, which are expected to rise by 5% in 2019-2020, reaching RMB287 per gram (~US$1,295/oz). This projected increase is anticipated to drive a 22%+ EPS CAGR for the company from 2018 to 2020. The company is currently valued at HK$17.82, with a target price of HK$23.20, representing a 30% upside.

Main Investment Highlights

• Positive Gold Outlook: Gold prices are expected to rise due to trade war uncertainties and a potential slowdown in the U.S. equity bull market. Central banks in emerging markets have increased gold purchases, supporting the demand side.
• Argentina JV (Veladero Mine): Shandong Gold owns a 50% stake in the Veladero mine with Barrick Gold, which accounted for ~24% of the company's 1H18 production. The mine has further exploration rights in the El Indio belt, offering long-term growth opportunities.
• PRC Gold Resources: The company's parent, SDG Group, has extensive gold mining and exploration experience in Shandong. It recently discovered a significant ore body in Sanshandao Xiling, and Shandong Gold has first right of refusal to acquire such resources.
• Strong Balance Sheet: Following its recent IPO in Hong Kong, Shandong Gold has a conservative net debt to equity ratio of ~53%, providing room for M&A activity. The company is also expected to acquire more mining and exploration permits from SDG Group by 2020.
• Attractive H Shares Valuation: The company's H Shares trade at 19.2x 2019 PER, below the 25x multiple used in the valuation model. This suggests potential undervaluation and a strong buy recommendation.

Key Financial Performance (2016-2020E)

Year	Revenue (RMB Mn)	Growth (%)	Net Profit (RMB Mn)	Growth (%)	EPS (RMB)	Growth (%)	PER (x)
2016	50,199	-	1,296	-	0.70	-	22.4
2017	51,041	1.7%	1,135	-12.5%	0.61	20%	25.5
2018E	52,182	2.2%	1,260	11.1%	0.63	4%	25.0
2019E	52,736	1.1%	1,775	40.8%	0.81	30%	19.2
2020E	53,583	1.6%	2,037	14.8%	0.94	15%	16.7

Growth Opportunities

• M&A Potential: The company has a history of acquiring gold assets from its parent, SDG Group, and has the first right of refusal for newly discovered resources.
• Exploration and Mining Permits: SDG Group holds key permits for exploration and mining, which are expected to be transferred to Shandong Gold by the end of 2020, with some decisions delayed until 2023.
• Argentina Projects: Barrick and Shandong Gold are exploring further cooperation in the El Indio Gold Belt. The Pascua Lama project, which straddles the Chile-Argentina border, has the potential to significantly boost production, with a 35-year mine life.

Risk Factors

• Decline in Gold Prices: A drop in international gold prices could negatively impact earnings.
• Environmental Issues: Barrick has faced several cyanide spills at the Veladero mine, which could affect operations and regulatory compliance.
• Pledged Shares: SDG Group has pledged 14% of Shandong Gold's shares, which could lead to potential share price pressure if the company experiences a steep sell-off.
• Mining Permit Transfers: While some permits are expected to transfer to Shandong Gold by 2020, others may take longer, potentially affecting growth timelines.

Valuation and Performance Metrics

• Target Price: HK$23.20 (25x 2019 PER), based on a 22%+ EPS CAGR forecast.
• H Shares Valuation: Trading at 19.2x 2019 PER, with a 30% upside to the target price.
• Earnings Sensitivity: Shandong Gold is highly sensitive to gold price changes, with a 27% earnings increase expected for a 5% rise in gold prices.
• Market Capitalization:
  • H Shares: HK$6,360m
  • A Shares: RMB52,445m

Conclusion

Shandong Gold is a strong performer in the Chinese gold mining sector, with a solid balance sheet and a clear path to growth through its existing operations, joint ventures, and potential M&A activity. The company is expected to benefit from a rise in gold prices and has a favorable valuation compared to peers. However, it faces risks such as environmental concerns, potential declines in gold prices, and the uncertainty surrounding the transfer of mining permits from its parent company. Overall, the company is recommended as a "BUY" with a target price of HK$23.20.