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研究部 (Research Team)
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CITIC RESOURCES ( 1205.HK）Resources deserve buying

Wednesday, September 9, 2009

5115

CITIC RESOURCES(1205)

Recommendation on 9 September 2009
Recommendation	BUY
Price on Recommendation Date	$2.290
Target Price	$2.920

Weekly Special - 425 Minth Group

Summary

Impacted by sluggish product prices, CITIC Resources experienced sharp declined profitability and realized a loss in 1H09. Looking forward, because of outstanding resources advantage and optimistic product prices, we forecast the net profit will be HK$39 million and 299 million in 2009 and 2010.we give it 2X P/B for 2010 BVPS, the 12-month target price will at HK$2.92, with Buy rating.

Loss in 1H09

CITIC Resources announced recently in the interim report that the revenue was HK$8.8 billion, decrease of 7.3%, and the net loss was HK$307 million, with EPS at HK$-0.0508 and no dividends. Conversely in 1H08, the Company had realized net profit of HK$520 million. The loss is attributable to the sharply declined product prices on the background of international financial crisis. For example, the ASP for its oil plunged 50%, and the oil business realized a loss of HK$37 million. In 1H08, its net profit was as high as HK$1.167 billion, accounting for about 2/3. What`s more, the aluminum business also recorded a loss of HK$66.3 million first because of the sluggish prices and the strong AUD. In sum, its gross profit decreased 64.6% to HK$763 million, with the gross margin plunging from 22.7% in 1H08 to 8.67%. Regarding the assets quality, the Company`s solvency and cash flow from operating have been improved in these years though it expanded quickly. Given no major investment recently, we think its financial status will keep stable.

Focusing on resources can provide guarantee

Looking into the business breakdown of CITIC Resources, first is the resources exploration including energy and metal mines, with the former consisting of oil and coal, and the later involving aluminum and manganese. What`s more, the export and import business contributes much, with the proportion of over 50%. However, it also focuses on the resources like iron ore, alumina, aluminum ingot and steel products. Nowadays the Company`s three main mine resources keep remarkable. First, the company has concentrated on crude oil asset enhancement, and has become the No.4 following the domestic Top three in this sector since 2006. Presently it owns prospecting and exploitation rights for three oil fields in Asia.

Second, Macarthur Coal is the largest low volatile pulverized coal injection coal producer in Australia, whose main shareholder is charged by CITIC Resources. Now Macarthur Coal have only developed the Coppabella and Moorval coal mine, with many others not exploited, and the developed resources just accounts for about 13% of total. In line with its annual report, Macarthur Coal is planning to develop the Middlemount coal mine, with the first stage production target of 1.8 million tons, 40% of production volume in 2009, which represents the optimistic growth of coal business.

Third, CITIC Dameng Mining Industries Limited focuses on integrating mining and further processing as main business, with 52.4% interests controlled by CITIC Resources. It is the largest Manganese sulfate export enterprise in China and key metal manganese producer in the world. Its reservation amounts to 22% of Chinese total, the No1 in China. In August, 2008, it also obtained manganese mining interests in Gabon, Western Africa, which will commence operation by the end of 2010.

On the whole, its resources advantage stands prominently. Looking forward, we believe the resources-relative enterprises will present attractiveness. Unless the credit system in America and Europe and the wealth allocation system is change basically, the global real economy`s recovery will be slowing because of the short consumption. Then the exit strategy can`t be put forward in time, so the inflation is inevitable because of great fund, which have been poured into the market. What`s more, the US Dollar`s Fix System will be shaken by America`s substantive debt, fiscal deficit and ever-growing trend in emerging economies, and the US Dollar will depreciate in medium to long term, which will make room for higher resources prices like oil and coal.

Oil business is expectable

As far, the oil business has become the main revenue and profit source for CITIC Resources. In 1H09, it made a loss because of weak price. However, taking consideration of the oversupplied fund and US Dollar depreciation, we expect the oil price will climb up vibrantly, with US$ 80 be targeted in one year, and US$ 100 in the longer time, which will benefit the profitability of the Company. Furthermore, as far as the Karazhanbas oil field project is concerned, its average lifting cost declined 21% to US$13.7 per barrel in 1H09, representing its outstanding cost controlling measures. What`s more, the tax burden will lighten significantly. Besides the downwards income tax rate, the Company is still seeking the favorable measures like Mineral Extraction Tax and etc.. We estimate the tax rate of the field will decline from 54% in 2008 to about 45% in 2009, even below 40% in future.

Besides, the performance of Indonesia Oseil shows inferior than CITIC Resources` expectation and won`t improve in short term, but the development of Hainan-Yuedong Block is advancing steadily, and the overall development plan may be approved in 4Q09, with the drilling of production expected to commence before the end of 2009. From the field investigation, the project will also take cyclic steam stimulation, and the average OPEX cost may be US$15-20 per barrel. Basing on the expectation of higher oil price, we are optimistic about the profitability of the project.

Import & export turn better

Import & export business contribute most for the company, consisting of 50% revenue in the last few years. At present, the Company trades alumina, iron ore and aluminum ingot from Australia and other countries to China; meanwhile imports commodities include steel, battery, ties and wheel from China to Australia. In 1H09, the business realizes the revenue over HK$ 6 billion, far beyond our expectation, because the trade volume of alumina and aluminum ingot from China to Austria made the export sales rise 32%.

The Chinese and Austrian economies are keeping good complementing relationship. Among first ten trade partnerships of China, the decline is the lowest with Austria, of 8.6% in first seven months. Since 2006, the trade relationship is strengthened gradually, and we believe the trend will keep up. On the background of good long term growth in Chinese economy, we think the business will become a stead profit source.

Risk

Global financial crisis becomes worse and the real economy bottoms again; Real economy recovers without inflation.

Valuation is still attractive

Considering the resources advantage and potential price advance, we expect revenue/net profit of HK$19.2billion/ HK$39million and HK$22.6billion/ HK$299million in FY09and FY2010 respectively, representing EPS of HK$0.006 and HK$0.05. The BVPS will stand at HK$1.46 in 2010. On valuation, the P/B for international oil sector can be 2 X even in trough, and historical average P/B of European and American metal & mines enterprises is also around 2 X. Considering recovered market confidence, with the resources advantage and foreseeable price improvement, we give it 2X for 2010 BVPS, the 12-month target price will be HK$2.92, with Buy rating.

Earning Forecast

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