1H12 losses due to iron ore impairment provisioning
In 1H12, revenue grew 0.95% YoY to Rmb107bn; net profit to shareholders was -Rmb186mn or -Rmn0.01/sh, in line with thecompany’s loss preannouncement. Th e loss was mainly due to an Rmb1.81bn of asset impairment provisioning for the Cape Lambertiron ore mine. Excluding the provision, net profit would be Rmb1.6bn, in line with our expectation.
Mild revenue growth was mainly fueled by stable expansion of construction business (+7.1% YoY), offsetting declines in equipment manufacturing (-10.6%), resource development(-43%), and real estate businesses (-16.4%).
Gross margin -0.3ppt YoY: GM +0.7ppt to 9.04% in construction, -0.6ppt to 6.77% in equipment manufacturing, +2.7ppt to 14.09% in real estate, but -18.4ppt to 2.74% in resource development, mainly because: 1) sustained losses in the Huludao Nonferrous subsidiary; 2) sharp decline inpolysilicon prices. After last year’s strong earnings, the company’s polysilicon business saw significant losses, with production -42% to 21.58mt in 1H12. The business may soon be suspended as the current sales price is lower than costs.
Financial expenses elevated notably. Sales expense ratio -0.1ppt to 0.7%, administration expense ratio +1.9ppt to 6.5%, and financial expense ratio +0.9ppt to 2.6% mainly due to rising interest expenses on expanded interest- b earing liabilities and mounted loan rates.
The value of newly-signed contracts -17.3% YoY to Rmb105.4bn in 1H12. The company believes the backlog value will likely remain Rmb230~250bn by end-2012, 1.3~14x of 2011’s project contract revenue.
Earnings forecast revision
Considering the huge impairment provisioning, we cut our 2012/13e earnings forecasts 59%/28% to Rmb1.76bn/Rmb3.34bn, implying an EPS of Rmb0.09/Rmb0.17, -59%/+90% YoY.
Valuation and recommendation
MCC-A/-H are trading at 0.8x/0.5x 2012e P/B; maintain HOLD rating on both as the company’s business is in transition and the recent resource price plunge may trigger resource value fluctuations.
We revise down MCC-H’s TP 8% to HK$1.58, implying 0.5x P/B.
The possibility of substantial impairment provisioning for otherresource projects can not be ruled out in 2H12
Risks
Uncertain settlement for the Sino iron ore project in Western Australia as the accumulated costs exceed the contracted value.