Summary

Xinjiang Xinxin Mining Industry Co. Ltd (Xinxin Mining or the Company) holds plentiful resources, with its parent group also owns rich reserves worthy of being acquired. Xinxin Mining is keeping a healthy financial situation, which can be expanded with higher leverage. Therefore, we are positive to the Company`s growth perspective. Furthermore, nickel price is expected to spiral up due to the improved demand. We forecast its net profit of FY09 and FY10 will be RMB215 million and RMB443 million, increasing by -28% and 106% YOY respectively. Giving it the P/B with 2X to FY10 BVPS, the 12-m TP of the Company will be HK$5.5, nearly 30% premium than current price. We initiate it Buy rating.

High-speed growth & Healthy financial situation

Xinxin Mining ranks the second in domestic nickel cathode manufacturers, with market share accounting for about 5%. It is principally engaged in the mining, ore processing, smelting and refining of non-ferrous metals including nickel and copper products.

Its operating history shows the Company holds the characteristic of high growth. From 2004 to 2008, its revenue and net profit increased from RMB 440/110 million to RMB 1180/300 million, with the CAGR of high 28% both. Benefited from the high self-sufficient ores, the profitability of Xinxin Mining is also very high, with gross margin at 40-50%. Not until late 2008 and early 2009, the margin declined to about 28% because of the slumped nickel price.

Regarding the financial situation, after succeeding being listed on the Stock Exchange of Hong Kong Limited(HKSE) in 2007, its current assets is around RMB 5.5 billion, 10X of that in 2004, and the total equity is above RMB5 billion, 16X of that in 2004. Its current asset-liability ratio holds a low 8%, with quick ratio above 10X. More than that, Xinxin Mining still held RMB3 billion cash and bank balances. From this point of view, the Company can enlarge its scale with higher leverage.

Assets enlargement will assure its growth in the near future

After raising capitals in 2007, Xinxin Mining has taken continuous measures to expand its resources. In late 2008, the Company was going to acquire three nickel-copper mines in Hami, Xinjiang, namely: Huangshandong, Huangshan and Xiangshan. The Acquisitions were completed in February 2009 and as a result of which nickel and copper reserves of the Company increase to approximately 315 thousand tons and 350 thousand tons, with the 92% and 35% growth respectively. In June, 2009, the Company purchased 95% stakes in Zhongxin mine and promised to increase the capital for it. After the reserve increase, its available mining years are above 40 years, which ranks high in domestic peers.

What`s more, as the holding parent company, Xinjiang Non-ferrous Metal Industry (Group) Ltd. possesses rich resources. According to the plan, the Group is going to inject the Asele Copper Mine and integrate other nickel and copper resources into the Company. Taking consideration of Xinxin Mining`s large amounts of cash and the ability to increase the leverage, we think the Company is faced with a sound challenge and the growing perspective is foreseeable.

Advantage on location

Xinxin Mining is located in Xinjiang, where owns the unique natural resources available for wide developing outlook, with vast varieties and huge reserves. As far, 138 kinds of minerals have been discovered and 117 kinds have been verified the reserves, among which, 5 kinds of minerals reserves stand the first nationally, 25 kinds hold the first five positions, 43 kind the first ten positions, 23 kinds the first in the North West. Taking the Hami as an example, 14 copper mines have been discovered and the proved resources are 650 thousand tons with the grade of 0.35%－0.81％. Furthermore, 6 nickel mines have been discovered there, with the forecasted resources of 15.84 million tons and the proved resources of 919.7 thousand tons, which ranks the first in Xinjiang and the second in the nation. Their grades are 0.31%-0.58%. The advantage on location will underpin the growth of the Company.

What`s more, as the largest autonomous region in China, Xinjiang also enjoys policy stimulus. For example, Xinxin Mining has been exempted the income tax between 2007 and 2010. In December, 2009, the Central Economic Working Conference took the revitalization of the Xinjiang Regional Planning as the issue, and some stimulating and preferential policies are expected to be put forward in 2010. With the resources advantages, we believe the resource development industry will be focused and encouraged in Xinjiang. The mining companies like Xinxin Mining are still possible to enjoy some preferential policies including income tax relief.

Regarding the economic development, Xinjiang often led the nation except the 2008 because of some political events. However, benefited from the strategy to promote Xinjiang, the negative impact will be weakened and its GDP will again lead others, which can also drive up the demand of metals.

Wide nickel demand

The nickel is for wide range of usages and the major demand comes from stainless steel. Looking into China and other countries, the growth of stainless steel are both rapid. From 1990 to 2007, global stainless steel production increased 5.1% annually, 1,54X of that of carbon steel. In China, with the urbanization and industrialization, the growth of stainless steel is higher, with the CAGR of 31.33% between 2004 and 2008, 1.78X of that of national crude steel output. Thereby, the production of stainless steel in China accounted for 26.79% of that of the world in 2008, significantly larger than 7.78% in 2003.

Even experiencing the high-speed growth, we still think the demand market of stainless steel is wide in China. In 2008, the apparent consumption of stainless steel only accounted for 1.39% of the crude steel consumption, which was high 2.21% in other countries. Meanwhile, the apparent consumption of stainless steel per capita was only 4.8 kilograms, which were far lower than the level of 17 kilograms in the Southeast Asia like Japan, Taiwan, Singapore and Korea. From this point of view, we keep optimistic about the medium & long term perspective of stainless steel, whose growth rate will still be higher than that of crude steel. Therefore, the nickel demand can see the potential of growing.

For 2010, international analysis institutions CRU and Brook Hunt both believe the nickel will face the shortage, among which the former expects the shortage of 56 thousand tons and the latter 10 thousand tons. In China, the demand on nickel is still strong. In January, the apparent consumption of nickel increased 38.6% YOY and 16% MOM, and the net import grew 110% MOM up to 11.72 thousand tons. The demand has driven up the nickel price in the past year. Jinchuan Nickel Group, the largest nickel manufacturer in China, has adjusted upwards the nickel price in early March, with the extent of above 3%, and new prices are also the highest since July, 2008. In our opinion, vast demand market will make the nickel price spiral up in 2010, which also will let the miner like Xinxin Mining win a higher profitability. Plus with the improved self-sufficiency ore rate after the increased resources, we think the gross margin of the Company will recover to high 40%-50%.

Risk

The resource tax may be levied and increase the tax burden;

The rate of expansion may be below expectation;

The operation is negatively impacted by sudden political events like national conflict.

To buy proactively for the expected high-speed growth

Xinxin Mining holds plentiful resources, with its parent group also owns good reserves worthy of being acquired. Xinxin Mining is keeping a healthy financial situation, which can be expanded with higher leverage. Therefore, we are positive to the Company`s growth perspective. Furthermore, nickel price is expected to spiral up due to the improved demand. We forecast its revenue of FY09 and FY10 will be RMB726 and RMB 1446 million, increasing by -38% and 99% respectively, net profit be RMB215 million and RMB443 million, increasing by -28% and 106% YOY respectively. And the EPS will be RMB0.10 and RMB0.20.

Regarding the valuation, we`d like to take the P/B method because of volatile performance. Tracking international nickel manufacturers, present P/B is 2X or higher. For Xinxin Mining, its profitability is equal to others, but the financial situation is better. Nowadays its P/B stands at the low level among the peers, below 1.7X. Considering the high growth of the Company, we give it the P/B with 2X. to FY10 BVPS, the 12-m TP of the Company will be HK$5.5, nearly 30% premium than current price. We initiate it Buy rating.

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