20180827-高盛-招金矿业-01818.HK-Earnings_Review__1H18_above_on_lower_expenses_7页_607kb

Zhaojin Mining Industry (1818.HK) Summary

Core Content

Zhaojin Mining Industry (1818.HK) reported its first-half 2018 earnings, showing a net profit of Rmb302 million, or Rmb0.094 per share, which is a 27% decline compared to the same period in 2017. However, this figure excludes a one-off hedging loss, with recurring profit at Rmb356 million. The company's performance exceeded expectations due to reduced other operating expenses.

Key Financials

• Revenue: Net revenue for 1H18 was Rmb2,869 million, down 6% YoY.
• Cost of Sales: Cost of sales decreased by 1%, to Rmb1,678 million.
• Gross Profit: Gross profit fell 11% YoY to Rmb1,191 million.
• EBITDA: EBITDA was Rmb2,226 million, up 1.0% YoY.
• EPS: EPS was Rmb0.094, down 27% YoY.
• Net Profit: Net profit for 1H18 was Rmb302 million, down 24% YoY.
• Recurring Profit: Recurring profit was Rmb356 million, down 39% YoY.

Financial Metrics

• Gold Production: Zhaojin produced 9.1 tonnes of gold in 1H18, which is 2% less than 1H17 and accounts for 51% of its full-year production.
• Gold Price Assumptions: Goldman Sachs revised its gold price assumptions upwards to US$1,340/oz (from US$1,251/oz) for 2018E, US$1,450/oz (from US$1,219/oz) for 2019E, and US$1,525/oz (from US$1,257/oz) for 2020E.
• Gold Output Growth: The Haiyu mine is expected to ramp up in 2021E, contributing 73% output growth from current levels.
• Production Cost: The company's gold production cost was Rmb146 per gram in 1H18, up 9% YoY due to higher environmental and safety costs.
• Inventory Days: Inventory days increased by 14% YoY to 428 days.
• Net Gearing: Net gearing adjusted (including perpetual bonds) reached 129% by the end of June 2018, up from 127% six months earlier.

Valuation and Target Price

• Current Price: HK$6.22
• 12-Month Price Target: HK$5.40, up from HK$5.20
• Valuation Metrics:
  • P/E ratio: 32.4 (12/18E)
  • P/B ratio: 1.3 (12/18E)
  • EV/EBITDA: 14.6 (12/18E)
  • CROCI: 3.1% (12/18E)
  • ROE: 4.1% (12/18E)
  • Net Debt/Equity: 88% (12/18E)

Investment Rating and Key Risks

• Rating: Sell
• Key Risks:
  1. Gold price fluctuations, which could impact FY19E earnings by 39% for every US$100/oz change.
  2. Project execution, which is critical for growth.
  3. Declining mine grade, which affects output and unit production cost.

Forecasted Growth and Margins

Key Assumptions and Financials

M&A and Factor Profile

• M&A Rank: 3, indicating a low probability of acquisition.
• GS Factor Profile:
  • Growth: Based on forward-looking sales, EBITDA, and EPS growth.
  • Financial Returns: Based on ROE, ROCE, and CROCI.
  • Multiple: Based on P/E, P/B, and EV/EBITDA.
  • Integrated: A composite of the above three metrics.

Company-Specific Disclosures

• Goldman Sachs had a non-securities services client relationship with Zhaojin Mining Industry.
• The firm makes a market in Zhaojin's securities.
• The M&A rank is based on qualitative and quantitative factors.
• The GS Factor Profile is calculated using normalized ranks for specific metrics.
• The company is part of the China Basic Materials sector.

Investment Banking and Rating Distribution

• Rating Distribution:

  • Buy: 35%
  • Hold: 53%
  • Sell: 12%

• Investment Banking Relationships:

  • Buy: 63%
  • Hold: 56%
  • Sell: 51%

Summary of Key Points

• Zhaojin's 1H18 earnings were lower than expected due to hedging losses, but better than anticipated due to lower expenses.
• The company's recurring profit was Rmb356 million, which is a key indicator of its operational performance.
• Gold production in 1H18 was 9.1 tonnes, down 2% YoY.
• The company expects gold output to remain at 18 tonnes for 2018E-2019E, with a significant increase expected from the Haiyu mine in 2021E.
• Goldman Sachs has revised its gold price assumptions upwards, leading to a higher 12-month target price of HK$5.40.
• The company's net gearing increased to 129%, and inventory days rose by 14% YoY.
• The investment rating remains Sell, with key risks tied to gold price volatility, project execution, and mine grade.
• The M&A rank of 3 suggests a low likelihood of acquisition.
• The GS Factor Profile provides a valuation context and highlights the company's growth, financial returns, and multiple metrics.