Core views
1. The company plans to acquire 100% of the shares of the Foshan subsidiary held by Huaxi Group in cash at a transaction price of 523 million yuan. The Buddha subsidiary is mainly engaged in the lead-zinc ore mining business. By the end of 2021, it had 6.75,000 tons of ore resources (including 195,000 tons of lead and 245,000 tons of zinc), adding 6.11 million tons of new resources in early 2024; the company now has an annual production capacity of 450,000 tons. It is expected that after the injection by the subsidiary is completed, production capacity is expected to increase further.
2. The injection of French subsidiaries is conducive to further solving competition problems in the industry. In addition to the Buddha subsidiary, Hechi Wuji, a subsidiary of Huaxi Group, and Laibin Huaxi Smelting are expected to complete the injection later. At that time, the company's resource reserves, product production and performance are expected to further increase.
3. Since the beginning of the year, the prices of tin, antimony, zinc, and lead have risen by 29.8%, 84.0%, 10.2%, and 19.9% respectively; it is expected that with the company's various projects being put into operation one after another and the Group's high-quality assets continue to be injected, the company's main product, tin, antimony, zinc and lead, is expected to rise sharply in volume and price.
occurrences
The company issued the “Notice on the Cash Acquisition of 100% Shares and Related Transactions in Guangxi Fozi Mining Co., Ltd.”
The company plans to acquire 100% of the shares of Guangxi Fosi Mining Co., Ltd. held by Guangxi Huaxi Group Co., Ltd. in cash at a transaction price of 525.0875 million yuan. After the acquisition is completed, the Ford subsidiary will become a wholly-owned subsidiary and will be included in the scope of the company's consolidated statements.
Brief review
1. The French subsidiary is about to be injected, and there is great potential to increase storage and expand production
The main business of the Buddha subsidiary is the mining and selection of lead-zinc ore. The core assets are 1 mining right and 1 prospecting right;
(1) Resource reserves: The subsidiary has two mining areas, the Guyi Mining Area and the Hesan Mining Area. The deposit mainly contains metals such as zinc, lead, copper, and silver. According to the “Resource Reserve Verification Report”, by the end of 2021, the Fuzichong lead-zinc deposit had 6.75,000 tons of ore resources, including 195,000 tons of lead metal and 245,000 tons of zinc; 15,000 tons of associated copper and 174 tons of silver. There is huge potential for increasing storage and production: According to a report by China Mining News on January 25, the Fuzichong mining area lead-zinc ore resource storage survey project undertaken by the 271 Geological Team is estimated to add 6.11 million tons of lead-zinc ore to the mine. The estimated potential economic value is about 4.2 billion yuan, which can extend the mine's service life by nearly 15 years;
(2) Production capacity: The company currently has an annual production capacity of 450,000 tons. We expect the production capacity to increase further after the injection of the subsidiary in France is completed;
(3) Profit: According to the company's announcement, the net profit achieved by the Buddha subsidiary in 2022/2023 was 27.86 million yuan/38.06 million yuan, respectively; the company's performance commitment to the subsidiary in 2024-2026 was 36.21 million yuan/39.35 million yuan/42.48 million yuan, respectively.
2. The interbank competition problem came first. After that, there are still two major group assets that urgently need to be injected into the French subsidiary, which will help the company to further focus on the main business, expand the scale of the mine, improve the main business capacity, and enhance the company's quality and core competitiveness. This transaction fulfilled Huaxi Group's promises during the restructuring of the company's major assets, which is conducive to further solving competition issues in the industry. In addition to the Buddha subsidiary, Hechi Wuji, a subsidiary of Huaxi Group, and Laibin Huaxi Smelting are expected to complete the injection later. At that time, the company's resource reserves, product production and performance are expected to further increase.
3. The main products, tin, antimony, zinc and lead, are expected to rise sharply in volume and price
Volume: According to the company's annual report and quarterly report, in 2023, the company produced 7196 tons of tin ingots (+55%, same below), zinc ingot output was 26,570 tons (+49%), lead and antimony concentrate production output was 14123 metal tons (+23%); 2024Q1 tin ingot output was 3,451 tons (+172%), zinc ingot production was 7049 tons (+41%), and lead and antimony concentrate production was 1,736 metal tons (+27%). According to the company's annual report, in 2024, the company will focus on promoting the tin-zinc mineral resource development project in the Tongkeng mining area, the Gaofeng 105 ore body production expansion project, the Tongkeng mine green intelligent mine construction project (Phase I), etc., and the continuous injection of high-quality assets of the Group, and the production of the company's main mineral products is expected to continue to grow.
Price: (1) Tin: On the supply side, the impact of volume reduction caused by the prolonged shutdown of production in Myanmar's Wa State will gradually become apparent, and “tight mining” is being interpreted as “ingot reduction.”
On the demand side, the global semiconductor market showed a good recovery trend and gradually entered an upward phase of the cycle. Semiconductors in fields such as artificial intelligence and electric vehicles have huge potential for growth, and the amount of tin used in photovoltaic welding belts is increasing. Under both supply and demand, the tin price center is expected to continue to move upward. Since the beginning of 2024 (as of June 20, same below), the price of SHFE tin has risen from 210,000 yuan/ton to 273,400 yuan/ton, a sharp increase of 29.8%; (2) antimony: on the supply side, antimony scarcity is high, global antimony ore production is declining year by year, and there is a shortage of antimony concentrate raw materials in the market; on the demand side, global demand for photovoltaic installations continues to rise in 2024. The demand for photovoltaic glass clarifier sodium antimony is expected to increase dramatically. Demand for flame retardants is expected to rise sharply in the context of the recovery of the electronic cycle. Combined with the needs of military industry, antimony batteries and other fields, The antimony mineral industry is expected to usher in an era of boom. Since the beginning of 2024, the price of Antaike antimony ingots (99.65%) has risen from 84,500 yuan/ton to 155,500 yuan/ton, a sharp increase of 84.0%; (3) zinc-lead: the price of SHFE zinc has risen from 21,600 yuan/ton to 23,800 yuan/ton, up 10.2%; the price of SHFE lead has risen from 15,900 yuan/ton to 191,000 yuan/ton, an increase of 19.9%; the prices of the company's main products have all increased to varying degrees.
Investment advice: The company's net profit from 2024 to 2026 is estimated to be 596 million yuan, 793 million yuan, and 1,070 million yuan, respectively. The PE corresponding to the current stock price is 19, 15, and 11 times, respectively. Considering the company's position and high growth in the tin, antimony and lead-zinc industries, the company is given a “buy” rating.
Risk analysis
(1) Risk of fluctuations in tin prices. The tin business is one of the company's main sources of gross profit. In 2023, the tin business accounted for about 43% of gross profit; tin prices are affected by factors such as supply and demand, and the economic environment, and are also closely related to the development of semiconductors, photovoltaics, etc. Fluctuations in tin prices will have a certain impact on the company's cost control and profits. According to our estimates, if the tin price falls by 5%/10% compared to our hypothetical value, the company's net profit to mother will drop 3%/6% in 2024.
(2) The price of raw materials has risen. If the prices of raw materials, labor costs, etc. rise, it will adversely affect the company's profitability.
(3) Environmental protection policies have been tightened. If environmental policies related to mineral development are tightened, it may affect the company's production of metal products.
(4) Downstream consumption falls short of expectations. If the downstream demand for the company's main products falls short of expectations, it will adversely affect the sales volume of the company's products.
(5) Compliance risk. According to the company's announcement, the company received a warning letter from the Guangxi Securities Regulatory Bureau on May 24. Due to calculation errors in the company's measurement of some assets and liabilities of the merged party Guangxi Huaxi Mining Co., Ltd., the relevant data for the first quarter, semi-annual report and third quarter of 2023 were incorrect.
The Guangxi Securities Regulatory Bureau decided to take administrative supervision measures to issue warning letters against the company, Chairman Huang Baoyuan, current chairman Cai Yong, then-general manager Yang Fenghua, then-financial director Li Xiaochen, and current financial director Guo Miaoxiu, and record them in the securities and futures market integrity file. On May 28, 2024, the China Securities Regulatory Commission published a notice “Decision [2024] 007 on Measures to Issue Warning Letters to Guangxi Huaxi Nonferrous Metals Co., Ltd. and related responsible persons” on its website. Investors need to be aware of the company's compliance risks.