The company achieved net profit of 1,052 million yuan in 2020, an increase of 119.5% over the previous year. The company focused on the main gold industry, benefiting from rising gold production and cost control. Against the backdrop of rising gold prices, the company achieved a sharp rise in performance. However, the short-term mine disaster affected production and costs. 2021Q1 performance declined 71.8% year over year, giving the company 40 times the PE valuation in 2021, corresponding to the target price of HK$9.20, and downgraded to an “increase in holdings” rating.
Net profit in 2020 increased 119.5% year over year, and the performance was in line with expectations. In 2020, the company achieved operating income of 7.649 billion yuan, an increase of 20.83% over the previous year, and achieved net profit of 1,052 million yuan to the mother, an increase of 119.53% over the previous year, achieving the highest performance in nearly 8 years. The increase in annual performance was mainly due to 1) a sharp rise in gold prices, 2) an increase in mineral gold production, and 3) a reduction in the overall cost of gold and gold by strengthening operation management. Among them, net profit for 2020Q4 was 161 million yuan, an increase of 64.6% over the previous year. The net profit of 2021Q1 was $222.8 million, down 71.8%/85.9% year-on-year. The main reason was that operating income fell to $1.38 billion, a decrease of 25.6% over the previous month, leading to a 28.2% decrease in gross profit and a loss of $22 million from changes in fair value.
Higher gold prices and lower costs and improved efficiency led to an increase in performance in 2020. The main drivers of performance are: 1) The company's mineral gold production in 2020 was 20.1 tons, up 1.67% from the previous year, including 16.5 tons of self-produced gold, up 5.61% against the market; 2) The spread of the epidemic in 2020, the geopolitical crisis and quantitative easing in various countries pushed up the price of gold. The average annual price of international gold was 1,773 US dollars/oz, up 27.53% year on year; 3) We estimate that the comprehensive cost of mineral gold produced by the company in 2020 was about 150.2 yuan/gram, down 5.2% from the previous year. Benefiting from rising gold prices and increased production, gross profit margin in 2020 was 47.3%, an increase of 11.1% over the previous year, leading to an increase of 1.3 billion yuan in gross profit.
The total gold production in 2021 is planned to be 36.26 tons. Affected by the mine disaster, the output of the annuity mine in 2021 is expected to fall short of expectations.
In 2021, the company plans to invest 195 million yuan in geological prospecting to increase gold resources by 44 tons and copper metal by 1,200 tons, and accelerate the deep development projects of the Xiadian Gold Mine, the Dayin Gezhuang Gold Mine and the Zaozigou Gold Mine. However, the Wucailong subsidiary, which holds 34.85% of the company's shares, exploded on January 10, 2021. The infrastructure project was completely stopped and rectified, and there was an overall impact on gold mine production in Shandong, which may affect the company's mining gold production in 2021 and cause delays in the completion of key mining system construction projects. It is recommended to focus on offshore gold mines with gold resources of up to 562.4 tons in the medium to long term. After completion, the company's equity output is about 9.6 tons.
Risk factors: Risk of gold price fluctuations, gold production falls short of expectations, and offshore gold mine production falls short of expectations.
Investment advice: The company focuses on the main gold business and relies on its high-quality mines to achieve steady operation, but due to the mine disaster, short-term self-produced ore gold production is expected to fall short of expectations, affecting the company's profit release. Combining the assumptions of gold production and price, the company's net profit forecast for 2021-2022 was lowered to 764/1,232 billion yuan (the original forecast was 1,571/2196 billion yuan), the new 2023 net profit forecast was 1,540 million yuan, and the corresponding EPS forecast for 2021-2023 was 0.23/0.38/0.47 yuan. The company was given 40 times the PE valuation in 2021, corresponding to the target price of HK$9.20, and downgraded to the “increase in holdings” rating.