CMOC Group Ltd - 1H23 results suffered from the DRC export restriction as expected; TFM operation normalisation to drive faster earnings CAGR (2022-2024)
- 2Q23 revenue fell 10.2% y-o-y to RMB42,443m on lower product prices
- Earnings plunged 83.6% y-o-y to RMB386m on margin squeeze; suffering from export restriction in the DRC, as alerted in the preliminary results
- Expect normalization of TFM mine operation to support quarterly earnings rebound, (+2% FY23F and -3% FY24F), raising our earnings CAGR (2022-2024) to 25% (from 23%)
- Maintain BUY on accelerating sales volume growth; and new TP HK$5.6, based on 2.0x FY23 P/BV unchanged
2Q23 revenue fell 10.2% y-o-y to RMB42,443m on lower product prices, which was largely in line with expectations.
Gross profit contracted 66.5% y-o-y to RMB1,284m due to slower cost reduction. We note that both 2Q23 and 1Q23 were influenced by export constraints on Tenke Fungurume Mining (TFM) in the DRC (Democratic Republic of Congo), leading to an 83.6% y-o-y net earnings decline in 2Q23, aligning with the preliminary results alert.
As expected, trading business revenue in both concentrate and refined metal products was maintaining largely stable. As per the latest disclosure, however, the gross profit margin of the IXM trading business further expanded to 1.82%, from 1.64% a year ago.
Gross borrowings rose 20% to RMB49,634m as of end-June 2023 versus end-Dec 2022’s RMB41,233m, resulting in the net gearing ratio rising to 23% from 14% accordingly. Considering the pattern of stronger sales and cash inflow into the second half, we believe the gearing level should be maintained at a relatively healthy level.
Outlook
With the recent news of TFM product exports resuming in June 2023, we expect unrealised external sales to be booked to drive an earnings rebound ahead. Based on our data on hand, we gauge that 200,000 tonnes of copper and 15,000 tonnes of cobalt products would be shipping out from 2H23 onwards, representing one-fifth of the total volume during 1H23, providing at least a billion dollars in revenue needed to be booked.
In addition, media reported that CMOC has agreed to make a settlement payment of US$800m between 2023 and 2028, roughly 10% of our earnings estimate, to Congo’s state-controlled mining company to end a dispute related to the Tenke Fungurume mine in the DRC. We believe that could ease the market doubt on the company’s continuity of operations and development.
In the meantime, the TFM project expansion progress is well on track thus far, which could also help drive further revenue growth ahead.
CMOC is a key cobalt producer and sold intermediate products of cobalt hydroxide to the international markets. The cobalt market demand for power batteries and digital batteries showed signs of recovery since 2Q. Also, the Ministry of Commerce indicated that it would study the possibility of exploring international markets for new energy vehicles, which will boost the demand for cobalt.
Despite the contraction in product margins amid an overall lower product market price, as per the development progress of the KFM projects, we have revised up our sales volume assumption for both copper and cobalt for this and next year, suggesting a potential over 7x rebound h-o-h in 2H. As such, we have revised down FY23F earnings by 2% and up FY24F earnings by 3%. We are projecting a new earnings CAGR (2022-2024) of 25%, from 23% previously.
CMOC has emphasised the new energy metal market would be the focus of the company’s future development strategy. The progress of CMOC's collaboration with CATL in Bolivia's lithium mine is on track, thereby bolstering the long-term prospects.
Meanwhile, our TP for the company’s H-share is pegged at HK$5.6, based on an unchanged 2.0x FY23F P/BV target multiple; A-share TP of RMB7.0 is based on 2.6x P/BV, reiterate BUY for the counter.
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