1H24 earnings slightly miss our expectationWestern Mining announced its 1H24 results: Revenue rose 10% YoY to Rmb25bn and attributable net profit grew 8% YoY to Rmb1.62bn. In 2Q24, revenue grew 26% YoY and 28% QoQ to Rmb14bn; and attributable net profit rose 7% YoY and 20% QoQ to Rmb884mn. The firm's earnings in 1H24 slightly missed our expectation, due to the non-operating expenses resulting from fines and the provisioning for fixed asset impairment.

Retrofitting of Yulong projects boosted the production volume of copper and molybdenum in 1H24; production volume of main projects exceeded the firm's guidance.

Corporate filings show that the company started the retrofitting of the first and second Yulong mineral beneficiation plants in March 2023, and the two factories started production in November 2023, with mineral treatment capacity increasing by 15%. The retrofitting of the two factories weighed on the production volume of copper and molybdenum in 2023, while the production capacity expansion could boost future production volume. In 1H24, the production volume of copper and molybdenum concentrates increased by 42% and 39% YoY to 85,235t and 1,926t.

As the mines owned by the company maintained stable operations in accordance to its production and operation plans, we estimate that the completion ratio of the semi-annual production guidance reached 112% for copper, 101% for molybdenum, 121% for lead, and 105% for zinc. The actual production volume of these products exceeded the firm's guidance.

In 1H24, prices of the firm's main products increased; gross profit grew rapidly as sales volume and product prices increased. iFinDdata shows that the average prices of copper, molybdenum, lead, and zinc in China rose 10%, 8%, 12%, and 1% YoY in 1H24. In 1H24, gross profit (tax and surcharge not excluded) increased by 40% YoY.

Fixed asset impairment losses and non-operating expenses weighed on earnings; provisioning for impairment mitigate pressure on futureearnings. According to corporate filings, the company made Rmb189mn　in provisioning for the impairment of some fixed assets, due to the retrofitting of some aging assets of Xiyu Metal and Shuangli Mining. In addition, non-operating expenses, including fines and liquidated damages, reached around Rmb169mn.

The firm began to conduct impairment tests on most retrofitting projects in 2023. It has also made provisioning for fixed asset impairment. We think the previous provisioning for fixed asset impairment will help the company mitigate pressure on future earnings, boding well for its business operations and earnings.

Trends to watch Steady progress in key projects; entering a stage of high-qualitydevelopment. According to the firm's announcement, in 1H24, it steadily advanced the capacity expansion project for the Yulong copper mine (30mnt) and the retrofitting and expansion project for the second iron mine of Shuangli Mining. We estimate that the firm's annual attributable production capacity of copper concentrates will increase by 30% after the launch of the Yulong phase III project.

Smelting - The firm continues to advance its smelting projects. It expects 2024 to be a year of high-quality development and management improvement, and it continues to implement its resource expansion and refined smelting management strategies.

Financials and valuation

We cut our 2024 net profit forecast 14% to Rmb3.32bn, given the impact of fixed asset impairment loss and non-operating expenses on earnings in 1H24. We keep our 2025 earnings forecast unchanged. The stock is trading at 11.4x 2024e and 9.5x 2025e P/E. We maintain an OUTPERFORM rating, but cut our target price 14% to Rmb20.97 to reflect the lower earnings forecast for 2024 and weaker risk appetite. Our TP implies 15.1x 2024e and 12.5x 2025e P/E, offering 32% upside.

Risks

Metal prices decline; production volume of main products disappoints; the company's projects proceed more slowly than expected.