1H24 results fall short of our expectations

The company announced 1H24 results: operating income of HK$4.07 billion, +39% year over year; net profit to mother of HK$0.113 billion, -37% year over year, lower than our expectations, mainly due to withholding tax on supplementary dividends, cost increases, and lower sales volume of Austrian companies.

Overall: In terms of price, the average sales price of 1H24's own production trade is 78.5 US dollars/lb, and the average sales cost is 86.4 US dollars/lb. In terms of production and marketing, 1H24's equity production of natural uranium was 654 tU, and its own production trade covered 564 tU of uranium products. The overall production was slightly lower than planned due to lack of sulfuric acid.

In terms of costs, the overall rise was affected by the rise in sulfuric acid prices and the increase in the MET tax.

Xie's production is steady, and costs have risen slightly. 1H24 Xie achieved 477 tU of natural uranium production, exceeding the plan. Among them, the amount of uranium extracted by the Xie mine was 182 tU, the production cost was 31.9 US dollars/lb, and the production cost was 23.8 US dollars/lb, contributing HK$0.21 billion in investment income.

Austrian production fell short of the target, and lower sales volume affected profits. 1H24 Austria achieved 858 tU of natural uranium production. Due to lack of sulfuric acid, the plan was not completed. Among them, the amount of uranium extracted by China Mining was 792 tU, the production cost was 22.5 US dollars/lb, and the production cost was 66 tU of uranium, and the production cost was 32.6 US dollars/lb. Affected by the pace of delivery, Austrian company's actual sales volume was lower than production volume, thus contributing only HK$0.23 billion in investment income.

Withholding tax on supplementary dividends affects short-term performance. The company paid dividend withholding tax at a 5% tax rate after acquiring Austrian companies in 2021, but due to changes in tax law practices in Kazakhstan, the company began using 15% withholding tax on dividends from 1H24 for all past and current dividends. The supplementary dividend withholding tax resulted in the company's income tax of HK$0.21 billion on 1H24, +278% over the same period.

Development trends

China's nuclear power approval sends a positive signal, and uranium prices are expected to continue their long-term upward trend. We believe that the long-term positive trend in natural uranium prices will not change. First, the recovery in global demand for nuclear power will be the general trend. In August, China approved 11 nuclear power units at once, sending a positive signal that China is developing nuclear power; second, global natural uranium supply disruptions are frequent, and the recovery of production capacity in Kazakhstan is limited due to a shortage of sulfuric acid supply, and the production plan for 2025 was lowered to 0.025-0.0265 millionTu. Third, uranium mines in Kazakhstan are gradually being exhausted. The company expects that starting in 2028, production mines around the world will gradually enter a peak period of production cuts and decommissioning.

Profit forecasting and valuation

Due to tax policy adjustments in Kazakhstan, we reduced net profit for 2024 and 2025 by 43% and 24% to HK$0.5 billion and HK$8.3 billion. The current stock price corresponds to the price-earnings ratios of 25.3 times and 15.2 times in 2024 and 2025. Considering that the price of natural uranium is expected to maintain a long-term upward trend, we have maintained an outperforming industry rating and target price corresponding to the price-earnings ratio of 27.1 times and 16.3 times in 2024 and 2025, with 7% upside compared to the current stock price.

risks

1) Uranium ore supply release exceeded expectations; 2) Nuclear power development fell short of expectations; 3) Kazakhstan's policy changes.