2023 attributable net profit misses; 1Q24 results largely in line

Tongling Nonferrous Metals Group announced its 2023 and 1Q24 results: In 2023, Revenue rose 12.81% YoY to Rmb137.45bn, attributable net profit fell 1.1% YoY to Rmb2.70bn, and recurring attributable net profit fell 25.01% YoY to Rmb1.87bn, missing our expectations. In 4Q23, attributable net profit fell 89% QoQ to Rmb123mn, mainly due to higher- than-expected costs and expenses in 4Q23 and provisioning for asset impairment losses. In 1Q24, attributable net profit grew 7.9 times QoQ and 67.8% YoY to Rmb1.10bn, in line with our expectations.

Copper smelting and processing fees and copper prices rose YoY in 2023, boosting earnings; copper prices remained high in 1Q24. In 2023, treatment and refining charges (TC and RC) of domestic copper concentrates averaged US$84.97/t, up US$7.22/t YoY, the average price of Shanghai copper rose 1.69% YoY to Rmb68,021/t, and the average domestic sulfuric acid price fell 57.98% YoY to Rmb237.05/t. The average price of Shanghai copper rose 2.2% QoQ to Rmb69,405/t in 1Q24, staying high.

Trends to watch

Injection of 70% equity stake in Mirador copper mine completed; we expect Phase II project of the mine to start operation. On August 2, 2023, 70% of CRCC-Tongguan was transferred to the company. According to the announcement, CRCC-Tongguan holds 100% of the Ecuacorriente, which has estimated copper resources of 2.53bnt with an average grade of 0.53%. Phase I of the Mirador mine reached design capacity in 2021, and has contributed considerable incremental copper concentrate to the company after being consolidated into its financial statements. Phase II of the mine is scheduled to start operation in June 2025, when the company expects its annual output to reach about 250,000t. In terms of profitability, CRCC-Tongguan’s net profit stood at Rmb1.66bn in 2023.

2023 copper output beats guidance; self-produced copper concentrate output surged YoY; aims high for 2024. In 2023, the firm’s self-produced copper concentrates contain 175,100t of copper1 (350% of　　its guidance) and 1.76mnt of copper cathode (103% of guidance), both among the highest in China. In 2024, the firm plans to produce its own copper concentrates containing 161,700t of copper and 1.73mnt of copper cathode, maintaining solid guidance.

As of end-2023, the firm’s copper foil production capacity reached 55,000t, and its lithium-ion battery copper foil capacity of 25,000t/yr was under construction with excess funds raised. The firm expects its copper foil production capacity to reach 80,000t in 1H24.

Announces shareholder return plan for 2024-2026, showing confidence in growth. The firm plans to pay a dividend of Rmb0.08 per share in 2023, and released a shareholder return plan for 2024-2026, under which it plans to achieve at least 50% of distributable profit in cash over the next three years when preconditions are met.

Financials and valuation

We maintain an OUTPERFORM rating. We keep our 2024 earnings forecast unchanged and introduce our 2025 net profit forecast Rmb4.81bn. We raise our target price 25% to Rmb5, given the sector-wide re-rating in the nonferrous metal market, the injection of high-quality copper mines, and the firm’s large capacity growth potential. The stock is trading at 13.1x 2024e and 10.6x 2025e P/E. Our TP implies 16.1x 2024e and 13.1x 2025e P/E, offering 24% upside.

Risks

Disappointing capacity ramp-up of projects and/or copper smelting and processing fees.