2023 results significantly beat our expectations

CMOC Group announced its 2023 results: Revenue rose 8% YoY to Rmb186.3bn, attributable net profit grew 36% to Rmb8.25bn, and recurring net profit grew 3% YoY to Rmb6.2bn. In 4Q23, revenue rose 35% YoY or 21% QoQ to Rmb54.6bn, attributable net profit grew 663% YoY or 234% QoQ to Rmb5.8bn, and; recurring net profit grew 258% YoY or 330% QoQ to Rmb4.9bn. We attribute the higher-than-expected earnings to significant growth in the sales volume of copper and cobalt and investment income from the disposal of the firm's Australian business.

TFM royalties issue properly settled; significant rise in copper and cobalt output and sales volume drove earnings to record highs. First, the firm's copper output and sales volume rose 52% and 105% YoY to about 419,537t and 414,671t in 2023, implying a completion rate of 101% of its full-year output guidance. Cobalt output and sales volume rose 174% and 52% YoY to about 55,526t and 29,733t, implying a completion rate of 112%. Second, the disposal of the firm's Australian business generated net income of US$252mn in 2023.

Despite falling resource grades, profits of the molybdenum and tungsten business and the niobium and phosphorus business fluctuated with prices. According to Asian Metal, the average prices of molybdenum and tungsten concentrates rose 36% and 5% YoY in 2023. As a result, the gross profit of the firm's molybdenum and tungsten segment rose 27% YoY to Rmb3.8bn, with GM up 1.3ppt. The niobium and phosphorus segment was mainly dragged by the price of phosphate fertilizers in Brazil. The gross profit of the niobium and phosphorus business fell 45% YoY to Rmb1.5bn in 2023, with GM falling 13.6ppt.

Trends to watch

The firm expects 2024 to be a year of "refinement," with continued earnings growth, resource expansion, and further optimization of assessment and incentive mechanism. First, as 2024 is the first year that TFM and KFM are operating at full capacity, the firm guides its copper and cobalt output at about 520,000-570,000t and 60,000-70,000t this year, with the average volume implying 30% and 17% YoY growth from 2023. The firm will focus on cost reduction and efficiency enhancement to boost earnings growth.

Second, it will strengthen internal geological exploration and launch reserve expansion plans to prepare for the development of TFM Phase III and KFM Phase II. It will also increase efforts to accelerate the expansion of external resources to cultivate new profit growth drivers.

Third, the firm plans to launch the Phase II equity incentive plan at an appropriate time to improve its long-term incentive mechanism.

Proposed a five-year development plan to achieve production ramp- up and take the first step towards becoming a top-tier global mining company. The year 2024 marks the beginning of the company's "internationalization 2.0" strategy. The company proposed development targets for the next five years: To achieve the second stage goal of "ramp up" of the "three-step" program and to take the first step towards becoming a world-class mining company. It plans to achieve annual output of 0.8mn-1mnt of copper, 90,000-100,000t of cobalt, 25,000-30,000t of molybdenum, and over 10,000t of niobium. We estimate that the average output of copper, cobalt, and molybdenum will increase by 115%, 71%, and 76% from 2023.

Financials and valuation

We largely maintain our 2024 and 2025 earnings forecasts. The firm's A- shares are trading at 17.3x 2024e and 15x 2025e P/E, and the H-shares are trading at 12.5x 2024e and 10.4x 2025e P/E. We maintain OUTPERFORM ratings for both A-shares and H-shares. As the firm guides strong output growth in the next five years, we raise our A-share TP 37% to Rmb9.44 (21x 2024e and 18x 2025e P/E), offering 20% upside, and we raise our H-share TP 26% to HK$8.02, implying 16x 2024e and 13x 2025e P/E and offering 25% upside.

Risks

Falling metal prices; disappointing progress of projects, production and sales volume.