1H11 results missing expectations
In 1H11, MCC had revenue of Rmb106.2bn (+19.2%) and net profit attributable to shareholders of Rmb1.97bn, or Rmb0.1/sh (-11.7%).
Stable revenue growth. The company posted revenue ofRmb106.2bn (+19.2% YoY), of which revenue from equipment manufacturing jumped 47.0% with new production linesstarting operation and reaching designed capacity; revenue from resource development soared 56%.
Gross margin fell 0.7ppt YoY, mainly because: 1) metallurgical projects made a smaller revenue contribution andconstruction GPM dropped 7.8ppt YoY; 2) real estate GPM fell 7.8ppt on a higher percentage of policy housing and primary land development; 3) equipment manufacturing and resource development GPM rose 0.5ppt and 7.7ppt, respectively.
Steel capacity expansion constraints weighed on core business. Newly-signed engineering contract volume rose 2.8%YoY to Rmb127.5bn in 1H11. Revenue from metallurgical projects accounted for 49.6% of construction business, down from 63.1% in 1H10.
Downward earnings revisions
1H11 results were lower than expected, and we cut our 2011/2012 earnings forecasts by 6.6%/11.4% to Rmb5.4bn and Rmb6.0bn, or EPS of Rmb0.28 and Rmb0.31, up 1.5%/10.9% YoY.
Valuation and recommendation
Currently, the A-share is trading at 11.2x 2011e P/E and 10.1x 2012e P/E, while the H-share is trading at 6.3x 2011e P/E and 5.7x 2012e P/E. We maintain an ACCUMULATE rating, with MCC-H 12-month TP at HK$2.8, implying 8x 2011e P/E. We think its non-metallurgic projects should be the future growth engine. Potential stock catalysts include an overseas mining project coming online and sustained development of policy housing construction projects.
Risks
Further slowdown of infrastructure and metallurgical project investment; risks arising from international business.