Tough 2H12 ahead; Lack of earnings visibility / catalysts in the near-term
The 52% decline in 1H12 recurrent profits to HK$1.9bn from a year ago hasshown how difficult the operating environment was for Citic Pacific (CP).Unfortunately, the company does not expect a significant turnaround in 2H12.To make matters worse, CP has delayed it first iron ore trial production againto November from its long-held target of end-August this year. In addition,CP’s inability to deliver an iron ore production target for FY13 at the analystbriefing has painted a gloomy outlook on the stock. As a result, a re-rating onthe stock seems unlikely without better earnings visibility and catalysts in thenear-term. Maintain Hold.
1H12 result largely in-line; Ebit margins squeeze of key segments
Citic Pacific announced a set of 1H12 results before lunch on Aug16 that waslargely in-line with DBe but about 5% below consensus. 1H12 headline netprofit declined 9% to HK$5.5bn. Excluding exceptional gains of HK$3.6bn thatincluded a HK$2.4bn disposal gain of Citic Guoan and HK$900m revaluationgains, recurrent profit has fallen 52% to HK$1.9bn that accounts for 41% ofour full year estimates. Therefore there is a downside risk to our full yearrecurrent profit forecast. Ebit margins of all key business segments havedeteriorated with special steel’s margin plummet to 3.7% from 8% in 1H11 andproperty margin dropped to 42% from 54%. CP has maintained an interimdividend of HK$0.15/sh. Net gearing remained at 85% that are unlikely toimprove significantly until at least 2014 when more iron ore will be produced.
2H12 remains challenging; Lower earnings in FY13 due to iron ore delay
As a result of another production delay and CP’s inability to give investors aclear guidance of iron ore production target in FY13, we have lowered ourassumption for FY13 iron ore production to 8m tones (2 lines) from 12m tonesresulting in a c. 9% cut in 13E EPS. CP expects special steel continues to facea tough operating environment in 2H12 as demand remains weak and overcapacityremains a concern. Residential property sales will remain subdue astightening measures are unlikely to be lifted in 2H12. In contrast, demand forcommercial properties is strong – CP has signed sales agreement of HK$13bnto build two office buildings in Lu Jia Zui, Shanghai but we believe profits areunlikely to be booked until FY14.
The stock is cheap trading at a 45% discount to NAV but re-rating unlikely
While we see value in the stock, trading at 45% discount to NAV (vs 10 yearaverage of 25%) or 0.5x PB, we have yet to find a catalyst for a re-rating on thestock. We have lowered our target price by 7% to HK$12.5 from HK$13.5mainly due to higher net debt it carries that lower our NAV. Maintain Hold.