Incident: China Metallurgical released its 2023 annual report. The company achieved revenue/net profit attributable to mother/net profit after deduction of 6338.7/86.7/7.55 billion yuan respectively, +6.95%/-15.6%/-21.9% year-on-year. The 23Q4 company achieved revenue/ net profit attributable to mothers/ net profit after deduction of 1665.5/4.9/-40 billion yuan, respectively, or -14.9%/-86.4%/-112.9% year-on-year.

Comment:

The steady growth in engineering contracts led to an increase in revenue, and a sharp increase in impairment accruals dragged down performance. In '23, the company achieved revenue of 5854.8/68.2/319.8/16.52 billion yuan, or +9.3%/-23.1%/+0.16%/-27.3%. The engineering contracting business grew steadily. Among them, housing construction and municipal infrastructure projects achieved revenue of 3433.5/121.37 billion yuan, an increase of 16.6%/9.5%. Affected by the continued downturn in real estate and the slowdown in project settlement, the company's impairment reserves totaled $8.95 billion in 23, an increase of 80.4% over the previous year. Of these, accounts receivables/ contract assets/ inventory impairment were $59.9/11.3/1.22 billion, respectively, up 66.4%/258.9%/4966.7%. The sharp rise in impairment charges dragged down the company's performance growth.

The gross margin of the engineering contracting business increased slightly, and expenses were well controlled during the period. In '23, the company's gross sales margin/net margin was 9.69%/1.8%, +0.05pct/-0.38pct, the gross margin of engineering contracting/resource development/specialty sector/comprehensive real estate was 9.1%/31.0%/15.8%/7.9%, and +0.25/-5.36/+2.09/-3.11pcts. The decline in mineral prices such as nickel, lead, and zinc caused the gross margin of the company's resource development sector to decline significantly. The company's expenses were well controlled in '23. The cost rate for the period was 5.72%, +0.01pct year on year, and the sales/management/finance/R&D expense ratios were 0.5%/1.95%/0.16%/3.11%, respectively, which was basically the same as the previous year. The company's net operating cash flow in '23 was 5.89 billion yuan, a decrease of 12.26 billion yuan compared to the previous year due to increased impairment and other reasons.

Overseas revenue and new contracts have increased, and resource business development can be expected. The company's domestic and foreign revenue in '23 was 6075.2 billion yuan, 26.35 billion yuan respectively, +6.7%/+14.5% year-on-year. In '23, the company signed new contracts of 1424.78 billion yuan, an increase of 6.0%. The amount of new overseas contracts signed was 63.38 billion yuan, an increase of 43.7% over the same period. In terms of resource business, the company's three production mines have stabilized production, achieving a total net profit of 1,214 billion yuan in 23 years; at the same time, the company continued to increase investment in risk exploration and deep edge prospecting, and discovered a total of 3.78 million tons of copper resources in Pakistan's Siadik copper mine in 23 (an increase of 15% over the previous year's estimate); the Einak copper project in Afghanistan has initiated supplementary exploration in the western mining area, which has further increased the project's copper resources from 11.08 million tons. The company's new silicon-based materials business is also actively promoted. It produced and sold 14,142 tons of new silicon-based material products in '23, achieving revenue/net profit of 56/220 million yuan, and a net interest rate of 40.2%. The first batch of 9 products in the second phase of the project is expected to be completed and put into operation in the first quarter of 2024, and production capacity is expected to expand further.

Profit forecast, valuation and rating: The company's 23-year performance growth fell short of expectations. Considering that domestic real estate and engineering project repayments are still under pressure, we lowered the company's 24-25 net profit forecast to 95.8 billion yuan and 10.42 billion yuan (31% and 34%, respectively). The net profit forecast for the new 26 years is 11.17 billion yuan. The company's main infrastructure business is developing well, overseas orders are increasing, and resource business reserves are abundant. We are still optimistic about the company's future development, and maintain a “buy” rating for both the company's A shares and H shares.

The risk indicates the risk of a decline in non-steel engineering; mineral resources business development falls short of expectations.