Results likely missed consensus on bad debts but copper outlook is positiveand valuation is undemanding; upgrading to BuyJiangxi Copper has historically offered the most direct exposure to the copperprice, both in terms of operations and share price correlation but the latterrelationship has faded in the past seven months. Our review highlights weakerdisclosure and the incidence of bad debts as probable factors and we look forgreater clarity with the full results release in late March. We have revised ourprojections to reflect latest price moves, the inclusion of preferential tax treatmentand our bullish copper outlook and see 20% upside to our fair value and upgradethe shares to BUY. We retain retain our copper sector preference for China Molyand Zijin and our Sell rating on JXC-A on valuation grounds.
Outlook for copper still positive; earnings growth despite potential bad debtsFrom an industry perspective, we remain positive on copper and expectedgrowing deficits towards 2020, supported by slow supply growth globally,potential disruptions, and higher-than-consensus expectations for Chinesecopper demand （~4% pa） over the next several years. Based on our latest copperprice forecast of $7,175/t and $7,500/t in 2018 and 2019, we raise 2018/2019earnings to RMB3.2b and RMB4.4b, suggesting 76%yoy growth in 2018 and37%yoy in 2019, respectively.
DCF mine of life; risks
Our target price of HKD14.2 is based on a life-of-mine DCF methodology, 8.4%WACC （3.9% Rf, 5.6% MRP and Beta of 1.1）。 With 20% potential upside, weupgrade JXC-H to Buy. The stock is trading at 10.5x/7.7x 2018/2019 DBe EPS,20% and 30%+ lower than its global peers. We however maintain a Sell rating onJXC-A on demanding valuation. Risks for JXC- H shares include a weaker copperprice, higher unit cost of production and potential bad debts. For JXC-A risks:
higher copper price due to copper mine disruptions, lower production cost if thecompany takes further initiatives on cost cut and lower bad debt.