Investment highlight
Chinalco International is a leader in the field of technology and engineering services in China's non-ferrous metals industry.
At present, the company is in the process of transformation and is committed to transforming from a design service provider to an EPC contractor to provide a complete comprehensive engineering solution for all stages of the non-ferrous metal industry chain. Further, take advantage of the downward compatibility of engineering technology to enter the field of civil engineering, including municipal infrastructure. We believe that after the adjustment of the business structure, the company is expected to achieve rapid growth.
Comment
1) Chinalco International accounts for only 5 per cent of the market share of EPC in the non-ferrous metals industry, which is far lower than that of China's ferrous metal engineering contracting and China railway engineering contracting market leaders. This means that Chinalco still has significant room for growth in the non-ferrous metals EPC market.
2) relying on the technical advantages of engineering design, the company has the absolute strength to enter the vast general contracting market. Industrial engineering technology is downwards compatible with civil engineering technology, so the company also has enough ability to enter the municipal construction general contracting market and increase its share in the general contracting market.
3) traditional investment in non-ferrous metal projects will continue to develop: 1) the transfer of production capacity from eastern China to the west; 2) overseas markets such as the Middle East and Russia are growing steadily.
In addition, the company's first-class equipment manufacturing technology in the field of non-ferrous metals will bring a broad space for industrialization development and become a long-term growth driving force.
Financial forecast
We expect 2012-2013 revenue to grow 41% and 33% year-on-year to 17.159 billion yuan and 22.797 billion yuan, respectively, and net profit to 1.128 billion yuan and 1.334 billion yuan respectively, or 0.42 yuan and 0.49 yuan per share.
Valuation and suggestion
Chinalco's current share price is trading at 6.7 times 2012 and 5.7 times 2013 earnings. For the first time, we focused on the "prudent recommendation" investment rating, with a target price of HK $4.0, corresponding to 7.7 and 6.6 times dynamic price-to-earnings ratios for 2012 and 2013.
Risk
Macroeconomic cyclical fluctuations; business structure adjustment did not achieve the desired results.