Jiangxi Copper:Results missed on price weakness and higher SG&A;maintaining Sell

Results missed on copper price weakness and higher SG&A; Sell on valuation.

    2016 outlook Jiangxi Copper’s (JXC) NPAT was RMB690m last year, representing a 78% YoY decline, on copper price weakness, higher SG&A expenses (RMB2.5bn in 2015 vs. our estimate of RMB1.8bn) and potentially limited cost reduction efforts during the period. We factor in the 2015 numbers, and lower our 2016 earnings by c.50%, to RMB471m, to reflect the higher SG&A. Meanwhile, we believe the P/E valuation is no longer appropriate for JXC, as it delivers limited earnings. We now use DCF life-of-mine to value this company, given its mining business nature. Maintaining Sell on rich valuation.

    2016 outlook.

    JXC plans to cut its copper cathode output by 75kt this year, to 1,175kt, as per the smelters joint curtailments meeting in late 2015. Its 2016 mined copper output target is 207kt, relatively stable vs. last year’s 209kt. Meanwhile, JXC proposed an A-share placement this February, with maximum proceeds of RMB3.5bn, mainly for the Chengmenshan mine Phase III project (10,000t/d), the Yinshan mine upgrade (8000t/d) and the Chengxin mine No.5 tailings dam project. The total capex plan for these projects is c. RMB7.4bn, and JXC expects to spend RMB4.5bn capex in total in 2016. Given the market volatility and uncertainty of the issuance, we have not factored this into our model.

    Sell on rich valuation; risks.

    We used to value JXC via a P/E methodology, but we find it less appropriate now, given its limited earnings during the metal downcycle. We believe it is more appropriate to adopt a DCF life-of-mine valuation, considering its mining nature, which is also consistent with other non-ferrous companies in our coverage, as well as names across the regions. Our RMB7.4 target price for JXC-A is based on a life-of-mine DCF methodology, 9.6% WACC (3.9% Rf, 5.6% MRP and a 1.4 beta), with the same applying to the JXC-H shares, translating into 0.6x 2016/17E BVPS. The shares are trading at c.100x/50x 2016/17E EPS and c.1.1x 2016/17E BVPS. The key risk to our call is better copper demand and supply discipline across the board. Maintaining Sell on rich valuation.