occurrences

Production capacity relocation and upgrade completed production in June, with net profit of 15 million yuan in the second quarter

In the first half of the year, the company achieved operating income of 4.188 billion yuan, and net profit of -34 million yuan. The losses were mainly due to the fact that the first quarter was in the production capacity trial production stage and the low production of refined zinc led to losses. The net profit for the second quarter was 15 million yuan. In the first half of the year, a total production of 150,000 tons of zinc (including zinc alloy) was completed, and four series of electrolytic zinc production lines were put into operation one after another. The production efficiency of stable operation gradually increased. The daily production of precipitated zinc reached 850 tons, reaching 94% of the design production capacity. The Changning zinc project achieved production results according to plan. Due to excessive asset construction losses due to the relocation, asset impairment losses were 3,075,300 million yuan in the first half of the year, compared to 1.41 billion yuan in the previous year, a decrease of 102.13%. At this stage, the relocation has been successfully completed, and there are no related asset impairments since then.

Brief review

The production of virgin zinc in the first half of the year was 50,000 tons, and the annual production target of 200,000 tons turned net profit into profit

The company plans to produce 200,000 tons of virgin refined zinc throughout the year. According to estimates, the production of virgin zinc in the first half of the year was about 50,000 tons, and the production in the second half of the year was about 150,000 tons. At this stage, all of its revenue comes from the zinc production business. Based on the average revenue of TC processing fees of 7,800 yuan in 2019, gross profit from annual sales is estimated to be 500 million yuan. After the company's production capacity was relocated and upgraded, the degree of automation of process technology was upgraded, the number of management personnel was drastically reduced, the remuneration payable to employees was reduced, and the depreciation amount of fixed assets at the Qingshuitang production base converted to assets held for sale decreased. The company's expenses for the full year fell from 569 million yuan in 2018 to 319 million yuan, a decrease of 44% over the previous year. Net profit for the whole year is expected to reverse loss and turn profit to 110 million yuan

Benefiting from TC's high-ranking zinc smelting has a gross profit of 2,300 yuan per ton, and the performance release is in line with expectations

Beginning in the second half of 2018, global zinc mines concentrated on increasing production and resuming production. From January to May 2019, global zinc concentrate production increased 2.7% year-on-year to 5.264 million tons. It is estimated that zinc concentrate production will increase by 650,000 tons throughout 2019, an increase of about 5%. However, the marginal increase in production of zinc smelting was limited due to long-term low capital expenditure and pressure from environmental monitoring. As a result, zinc smelting experienced a bottleneck in production capacity in 2019-2020, and the increase in the smelting gap prompted processing costs to be high for ten years. TC processing fees for zinc concentrates continued to rise in 2019, rising from 7130 yuan at the beginning of the year to a high of 8,344 yuan in the second quarter, with an average price of 7,800 yuan in the first half of the year, reflecting the tight production capacity of zinc smelting, and related production capacity is in a high-profit boom cycle.

The company produced 50,000 tons of virgin zinc in the first half of the year, gross profit was 116 million yuan, gross profit per ton was about 2,320 yuan. Corresponding to the company's smelting cash costs were 5,480. The performance release was in line with expectations. Since the company was in the trial production stage after the relocation in the first quarter, the smelting cost per ton was high in the first half of the year. It is expected that the smelting cash cost will be reduced to 5,000 yuan after production capacity stabilizes in June. Demand for zinc in industrial production weakened year on year. The commodity cycle declined, and zinc prices were falling under pressure. The average price of zinc TC is expected to be 7,700 yuan in the second half of the year. The company's zinc production line has reached full production. It can produce 150,000 tons of raw refined zinc in the second half of the year. Gross profit can reach 405 million yuan, net profit is about 150 million yuan, and net profit is about 150 million yuan. The net profit for the whole year can be expected to be corrected.

Profit forecasts and investment advice

The company's production capacity relocation and production have been successfully completed. After delivery in the second quarter of 2019, it will benefit from profit elasticity brought about by the TC boom cycle, increased efficiency brought by new production capacity, and its annual performance will turn loss into profit, and become a domestic lead-zinc smelter with leading efficiency. After the company moved, electricity costs fell by 0.07 yuan per ton, comprehensive energy consumption dropped 58%, and staffing was reduced by 80%. Production capacity bottlenecks in the zinc smelting industry gradually became apparent in 2019, processing costs continued to rise, and will remain high until after 2020. It is recommended to focus on investment opportunities brought about by Zhuye Group's performance recovery. After 2019, when new production capacity is put into operation and gradually stabilized after production, it will reverse performance and bring the company 500 million yuan in gross profit and 110 million yuan in net profit.

We expect the company's revenue from 2019 to 2021 to be 4.83 billion yuan, 6.63 billion yuan and 5.95 billion yuan respectively, up -62.8%, 37.2% and -10.2% year-on-year; achieving net profit of 110 million yuan, 240 million yuan and 170 million yuan, up -107%, 117% and -29% year-on-year; EPS per share is 0.21 yuan, 0.46 yuan and 0.33 yuan respectively. Net assets per share were $0.31, $0.77, and $1.1, respectively. The corresponding PE from 2019 to 2021 was 40.75 times, 18.76 times, and 26.49 times, respectively, and PB was 28.29 times, 11.28 times, and 7.91 times, respectively. Considering the gradual increase in zinc processing fees, the company's new production capacity efficiency has a leading advantage. The company was given an increase rating of 45 times PE in 2019, with a target price of 9.45 yuan for 6 months.

Risk analysis

The sharp drop in zinc prices in a short period of time caused the loss of inventory prices to greatly affect profits.

There was a conflict that was difficult to reconcile with employee placement, and government and group support was not in place, leading to an increase in non-operating expenses and a decline in profits.

The progress of commissioning equipment for new production capacity fell short of expectations, causing phased production to drag down production and operation plans throughout the year.