2023 results miss our expectations
Metallurgical Corporation of China (MCC) announced its 2023 results: Revenue rose 6.95% YoY to Rmb633.87bn and attributable net profit fell 15.6% YoY to Rmb8.67bn. In 4Q23, revenue fell 14.9% YoY to Rmb166.55bn and attributable net profit dropped 86.3% YoY to Rmb487mn. The firm's 2023 earnings missed our expectations, mainly due to higher-than-expected impairment provisions in 4Q23.
Engineering business grows steadily; gross margin improves. In 2023, revenue from the engineering contracting business rose 9.3% YoY to Rmb585.48bn, and gross margin rose 0.25ppt YoY to 9.1%. Its engineering business maintains sound growth momentum, with returns improving.
Resource development and real estate businesses under pressure. In 2023, revenue from the resource development business fell 23% YoY to Rmb6.82bn, and gross margin fell 5.36ppt YoY to 30.99%. Revenue from the comprehensive real estate business fell 27% YoY to Rmb16.52bn and gross margin dropped 3.11ppt YoY to 7.89%.
Full-year operating cash flow under pressure; cash flow in 4Q23 significantly improved. The firm's net operating cash flow dropped 67.5% YoY to Rmb5.89bn in 2023. In 4Q23, its net operating cash flow rose Rmb8.65bn YoY to Rmb28.37bn.
Impairment provision weighs on profit. The firm booked Rmb1.39bn in asset impairment losses and Rmb3.54bn in credit impairment losses in 4Q23, weighing on full-year earnings.
Trends to watch
Engineering revenue and orders grow steadily; growth of core business shows resilience. In 2023, revenue from the engineering contracting business rose 9.3% YoY, with new contracts increasing 6.0% YoY to about Rmb1.42trn. The firm's new overseas contracts increased 43.72% YoY to Rmb63.38bn in 2023, a record high. We expect the firm's core business to maintain solid growth.
Resource development business under pressure; watch potential earnings growth. In 2023, revenue and net profit of the firm's resource development business dropped 23.1% and 5.6% YoY, as prices of nickel, zinc, and cobalt dropped from highs in 2021–2022. Nickel output of its project in Papua New Guinea fell 2.03% YoY and cobalt output grew 2.85% YoY. Crude copper output of its project in Saindak, Pakistan rose 4.26% YoY. Zinc output and lead output of its project in Dudda, Pakistan fell 2.49% and 11.79% YoY. We suggest paying attention to the recovery of ore prices and the potential upside in sales volume, prices, and earnings of the firm's copper-gold mine project in Saindak driven by rising copper prices and production capacity expansion.
Financials and valuation
Given the lackluster downstream demand, we lower our 2024 and 2025 attributable net profit forecast 34.4% and 34.4% to Rmb9.25bn and 10.29bn. A-shares are trading at 7.5x and 6.8x 2024e and 2025e P/E, and H- shares are trading at 3.3x and 2.9x 2024e and 2025e P/E. The firm's current valuation is attractive. We maintain OUTPERFORM for A-shares and H- shares, and maintain our TPs of Rmb4.6 (10.3x and 9.2x 2024e and 2025e P/E) offering 36.9% upside and HK$2.13 (4.2x and 3.7x 2024e and 2025e P/E) offering 27.5% upside.
Risks
Falling ore prices; disappointing project progress.