3Q24 results beat our expectations

Metallurgical Corporation of China (MCC) announced its 1-3Q24 results: Revenue fell 11.7% YoY to Rmb412.6bn and attributable net profit fell 16.5% YoY to Rmb6.83bn. In 3Q24, revenue fell 14.4% YoY to Rmb113.8bn, and net profit attributable to shareholders grew 177.5% YoY to Rmb2.68bn. The firm's 3Q24 results beat our expectations, mainly due to the write-back of large impairment losses in 3Q24.

Gross margin fell slightly; expense ratio rose. The firm's blended gross margin (GM) fell 0.2ppt YoY to about 9.0% in 1-3Q24, and fell 0.1ppt YoY to around 9.0% in 3Q24. This, coupled with the widening revenue decline in 3Q24, may reflect pressure on project settlement, in our view. In 1- 3Q24, the firm's selling, G&A, and financial expense ratios rose 0.1ppt, 0.3ppt, and 0.1ppt YoY, while the R&D expense ratio fell 0.02ppt YoY. In 3Q24, selling, G&A, R&D and financial expense ratios expanded 0.1ppt, 0.2ppt, 0.02ppt and 0.1ppt YoY.

The write-back of heavy impairment losses, coupled with lower income tax expenses, supported net margin. The firm wrote back about Rmb569mn of asset and credit impairment losses in 3Q24 (vs. a net loss of Rmb932mn a year earlier), which we think may indicate sufficient impairment provisions. In 3Q24, the firm's income tax expense fell by Rmb730mn YoY to Rmb237mn, which also contributed significantly to its net profit. In 3Q24, the attributable net profit margin rose 1.6ppt YoY to about 2.4%.

Net cash outflow continued; cash flow improved notably in 3Q24. In 1- 3Q24, the firm's net operating cash flow was about -Rmb30.7bn (vs. - Rmb22.5bn in the same period last year). However, the firm's net operating cash flow was about -Rmb2.33bn in 3Q24 (vs. -Rmb7.96bn in the same period last year), implying a sharp decline in net outflows. We believe this may be due to the firm's improved management of payment collection.

Trends to watch

Total value of new contracts declined, but overseas growth was strong. The value of MCC's new contracts fell 9.2% YoY to Rmb891.7bn over 9M24, and fell 18% YoY to Rmb213.9bn in 3Q24. We attribute the decline in new contract value to falling demand, tight funding along the value chain, and possibly the firm's efforts to strengthen management of new contracts and improve the quality of new contracts. Over 9M24, the total value of new overseas contracts rose 85.2% YoY to Rmb60.8bn. We expect the firm's overseas business to maintain rapid growth.

Financials and valuation

Due to lower revenue and gross margin assumptions, we cut our 2024e and 2025e attributable net profit forecast by 20% and 20% to Rmb7.44bn and Rmb8.24bn. The firm's A-shares are trading at 9.1x 2024e and 8.2x 2025e P/E, and the H-shares at 4.2x 2024e and 3.6x 2025e P/E. We maintain OUTPERFORM ratings for both A-shares and H-shares.

However, we cut our A-share TP 15.2% to Rmb3.9 (10.9x 2024e and 9.8x 2025e P/E; 19% upside). We cut our H-share TP only 6.1% to HK$2.0 (5.1x 2024e and 4.4x 2025e P/E; 21% upside), as the H-shares' P/B is only 0.3x, offering a margin of safety.

Risks

Project progress disappoints; impairment pressure worse than expected.