Event

Zhuzhou Municipal people's Government authorized Zhuzhou Land Reserve Center Collection and Storage Company to be located in Zhuzhou Qingshuitang production area of state-owned land use rights, with a total land certificate area of 1160652.65 square meters. The assets in the land collection and storage include the right to the use of the state-owned land and the above-ground structures belonging to the company. Zhuzhou Land Reserve Center will pay the company 1.3 billion yuan in compensation for asset collection and storage.

Brief comment

As the production base was included in the pilot scope of the transformation of the old industrial zone, the company's production land in Qingshuitang area was recovered by the Zhuzhou municipal government in accordance with the law, and the municipal government gave the company 1.3 billion yuan in land collection and storage funds. The payment time node is 500 million yuan before September 30, 2018, another 600 million yuan before November 30, 2018, and the remaining 200 million yuan will be paid in time depending on subsequent land delivery. This fund corresponds to the impairment of fixed assets of 1.368 billion yuan in the second quarter of 2018, which has been reflected in the semi-annual report, which is the main reason for the negative net profit of the company this year. After June 2018, the assets for sale formed by land use rights are gradually transformed into income from asset disposal, increase monetary funds and improve the company's cash flow.

At present, the company has shut down the old production capacity located in Qingshuitang Industrial Zone, Zhuzhou City, and the newly completed 300000 tons of zinc and 100000 tons of lead and precious metals smelting project is located in Hengyang City Shuikoushan Circular economy Industrial Park, and has now started trial production. and successfully put into operation on December 26, 2018, producing the first batch of zinc ingots. It is expected that the company's new production capacity will gradually reach production in the second quarter of 2019, with an annual output of 250000 tons of zinc. In 2019, when zinc concentrate TC processing fees are clearly upward, the company's performance will be significantly repaired thanks to the high proportion of zinc smelting business.

TC enters the upstream business cycle, and performance is expected to rebound.

In the third quarter of 2018, the TC of zinc concentrate smelting processing fees at home and abroad increased significantly, and accelerated in the fourth quarter. At present, the processing fee of domestic zinc concentrate has climbed to 7300 yuan, breaking through the high level since 2008, and the profit of the smelting industry has changed from loss to profit. The spot TC transaction of imported zinc concentrate has increased greatly to US $205. coupled with the difference in recovery, the average processing fee of the imported mining industry has exceeded the domestic ore processing fee of 300 yuan. After the new production capacity was put into use in 2019, about 30% of the company's zinc ore raw materials use imported zinc concentrate, mainly provided by Minmetals Resources MMG. When the processing fee of imported ore enters the range of comparative advantage, enterprises that use more imported zinc concentrate will also gain structural profit advantage. From the growth of overseas zinc ore production, the rise of port concentrate inventory, but the continuous decline of refined zinc production, we can see that zinc smelting has become the bottleneck of zinc supply. After the zinc smelting supply bottleneck was established, zinc prices also stabilized and rebounded, and recently the spot remained at 22000 yuan and continued to rise. We believe that zinc smelting TC processing fees will rise periodically and continue for 2 years. At present, there is still room for further upward movement, and the first half of 2019 will become the most concentrated period of contradictions.

The rise in TC generally comes from insufficient smelting capacity or an increase in zinc ore production. At this stage, the rapid rise of zinc concentrate TC only fulfills one side of the logic, mainly due to the reduction of production at the smelting end caused by a series of environmental protection policies at the zinc smelting end. In fact, on the other side, the increase in the production of the global zinc mine is offset by the production reduction of domestic small and medium-sized mines, and the pressure of overseas zinc concentrate production is not reflected. In 2019, with the increase in the production of overseas mines, the marginal production is bound to increase, thus further improving the bargaining power of smelters, so we determine that there is still room for upward processing fees, and the company's gross profit will rise. Home net profit and balance sheet will be repaired, and the company's share price will rise with it.

The production line of zinc and precious metals is leased out, and business is further concentrated in zinc smelting.

The company announced on December 14, 2018 that the newly built 100000 tons of lead and precious metals smelting production line in Shuikoushan Park would be leased to Shuikoushan Nonferrous Metals Co., Ltd. The total annual rent is RMB 18 million, which is paid in two installments, of which RMB 9 million is paid on the day when Shuikoushan Nonferrous Metals Company accepts the leased assets, and RMB 9 million is paid after the expiration of 180 days of acceptance. Zhuye Group lead refining project fixed asset investment of 428 million yuan, planning for the trial production period before July 2019, the second half of the year to strive to meet the standards of production, the formulation of June 2019 solid conversion, 1800 million meet the performance target of the trial production period. According to the company's annual report, zinc smelting from the old capacity of Zhuzhou smelter Group accounted for 61% of the main operating revenue and 66% of gross profit in 2017. After the relocation and upgrading, the refined lead and precious metal production lines are leased to Shuikoushan Nonferrous Metals Company, and the company's main business is more concentrated in zinc smelting. The proportion of smelting business is expected to rise further to 90% by 2019.

Zhuye Group Shuikoushan production base continues to use the more mature wet zinc smelting, the production energy consumption is reduced from the old capacity 2100kgce/t to 871kgce/t, but also lower than the industry energy consumption limit advanced value 1150kgce/t. The new capacity has a higher degree of automation, the number of employees in enterprises has been reduced from more than 5,000 to more than 1,000, the ratio of output per unit of personnel has increased significantly by 60%, and management costs will be significantly reduced. The power consumption cost of Shuikoushan Industrial Park is 0.07 yuan lower than that of Qingshuitang Park. Calculated on the basis of 0.49 yuan electricity cost, the zinc smelting capacity of 300000 tons can be saved by 35 million yuan in the new park. And the newly moved factory has complete facilities to deal with zinc slag, and the hidden danger of environmental protection is low, which reduces the operational risk of reducing production due to environmental protection problems in the industry.

Profit forecast and investment advice

The company is in the period of capacity upgrading and replacement. After reaching production in the second quarter of 2019, it will benefit from the profit flexibility brought by the TC uplink cycle, the benefit brought by the new capacity will be improved, the performance will turn into a profit, and it will become a leading lead and zinc smelter in China. After the relocation of the company, the electricity charge decreased by 0.07 yuan per ton, the comprehensive energy consumption decreased by 58%, the staffing decreased by 80%, and the sulfuric acid income increased. The capacity bottleneck of the zinc smelting industry is gradually emerging, and processing fees continue to rise and will be maintained after 2020. After 2019, the new production capacity is put into production and gradually reaches production steadily, which will bring a reversal to the performance and a gross profit of 1.1 billion yuan and a net profit of 732 million yuan for the company.

We expect the company's revenue from 2018 to 2020 to be 11.9 billion yuan, 6.35 billion yuan and 6.33 billion yuan respectively, an increase of-13.9%,-46.5% and-0.3% over the same period last year. The net profit returned to the mother was-1.11 billion yuan, 732 million yuan and 552 million yuan, up-2094%,-166% and-24.6% respectively, and the EPS per share was-2.1,1.39 and 1.05 yuan respectively. The net assets per share are 0.51 yuan, 1.9 yuan and 2.94 yuan respectively. From 2018 to 2020, the corresponding PE is-3.9x, 5.9x and 7.9x, and the PB is 16.1x, 4.3x and 2.8x, respectively. Considering the gradual increase in zinc processing fees, the company has a leading advantage in new capacity efficiency, giving the company a rating for increasing its holdings, with an 8-fold PE valuation in 2019 and a 6-month target price of 11.1 yuan.

Risk analysis.

Zinc prices fell sharply in a short period of time, resulting in inventory price losses that greatly affected profits.

There is an irreconcilable contradiction in staff placement, and the help of the government and groups is not in place, resulting in an increase in non-operating expenses and a decline in profits.

The commissioning progress of the equipment for the start of the new capacity is not as expected, resulting in a drag on the production and operation plan for the whole year.