Action
MCC's 2013 earnings in line, with business size controlled and asset quality improved. Currently, MCC-H is trading at 5.6x 2014e P/E and 0.4x 2014e P/B, historical lows. Given the decline of future risk and the improvement in asset quality, we maintain our TP for MCC-H at HK$1.56, implying 0.5x 2014e P/B. As asset quality risk declines, the valuation may increase, and we upgrade the rating of MCC-H to ACCUMULATE.
Reasoning
In 2013, the company recorded operating revenue of Rmb202bn (-6.5% YoY) and net profit of Rmb2.98bn (+142.9% YoY), implying EPS of Rmb0.16, in line with expectation. The company declared a dividend of Rmb0.06/sh, implying a dividend yield ratio of 6.1%.Revenue fell, while gross margin rose significantly. In 2013, comprehensive gross margin improved due to adjustments to business structure. Expense ratio rose slightly, while net margin increased thanks to a notable decline in asset impairment loss. 2013 saw net operation cash inflow of Rmb20bn, which was Rmb15.6bn higher than last year.
Construction business to make transformation. The company has accelerated transformation by exploring the non-metallurgical market. However, the overall room for growth is limited.MCC exerts stringent control on risk and controls business size. To control risk, the company does not take on new BT projects where it provides advanced funding; it strengthens the clean-up of accounts receivable and inventory and the governance of loss-making entities. MCC has completed a check of risks and asset quality has improved significantly.
Earnings forecast and valuation
We maintain our 2014 earnings forecast at Rmb3.364bn and expect 2015 earnings to be Rmb3.55bn, implying EPS of Rmb0.18/0.19, up 13%/5.5% YoY.
Risks
Macro liquidity tightening.