HUAYOU COBALT(603799)：EXPANDING IN INDONESIA; RESTRICTED STOCK INCENTIVE PLAN SHOWS CONFIDENCE

　　What's new
　　On July 25, Huayou Cobalt announced that it plans to acquire a 50.15% stake in Andalan Metal Industry (AMI), a nickel ore processing company with a production capacity of 24,000t of ferronickel materials, for a total investment of US$200.4mn. The company also plans to establish a joint venture in Indonesia with an annual production capacity of 50,000t of nickel sulfate. Furthermore, the firm released the draft of its 2023 restricted stock incentive plan.
　　Comments
　　Nickel production capacity continues to increase; vertical industry　integration continues to improve. The company announced that it plans to acquire two ferronickel rotary kiln electric furnace (RKEF) production lines from AMI. These production lines have an annual capacity of 150,000 tonnes of ferronickel, which is equivalent to 24,000 tonnes of nickel, and are in line with the company's medium and long-term development strategy. We think this acquisition, together with related technology upgrades, will notably increase the company's nickel matte production capacity.
　　We believe this move will have three impacts:
　　Further enhancing the firm's nickel production capacity, which has a planned nickel production capacity of 665,000t, solidifying its leading position in the nickel industry.
　　Improving the integration of the company's nickel smelting process.
　　Strengthening cooperation with upstream resource companies to ensure the safety, stability, and diversification of nickel supply.
　　The company is expanding its presence in Indonesia's nickel value chain, from crude refining to refined nickel, with the aim of improving profitability and promoting sustainable development. The company is　planning to invest US$200mn to establish Huaxiang Refining Indonesia, a nickel sulfate joint venture in Indonesia with an annual production capacity of 50,000t of nickel sulfate. This venture will be carried out in cooperation with Strive Investment Capital and Lindo Investment PTE. The firm will hold a 49% stake in the joint venture.
　　We believe that the firm's expansion into the nickel sulfate refining segment in Indonesia will effectively mitigate the risk of bottlenecks in nickel sulfate refining production capacity under the integrated business model. In addition, the nickel sulfate production line possesses flexibility, allowing it to be converted into an electrolytic nickel production line if needed. This adaptability enables the firm to adjust its production in response to the profitability of different products, effectively enhancing its earnings potential under the background of falling metal prices. Moreover, the firm is actively expanding its presence in downstream sectors related to alternative fuel vehicles in Indonesia. We think this strategic move aligns with Indonesia's policy direction and is likely to contribute to its sustainable development in the country.
　　Draft plan for 2023 restricted stock incentive plan to boost earnings　confidence. The firm plans to grant 19.71mn restricted shares with a price of Rmb25.38/sh for the first time, accounting for about 1.16% of the firm's total share capital after the conversion of convertible bonds as of July 24, 2023. The incentive plan targets a total of 2,211 employees, including directors, senior executives, core managers, and key employees, and the assessment year is 2023-2025.
　　We believe the incentive plan reflects the firm’s confidence in its future growth. According to our model forecast, the firm’s attributable net profit will grow at a CAGR of 42% over 2023-2025. We expect the firm to enter a new stage of rapid and visible earnings growth in the next three years.
　　Financials and valuation
　　Given falling average nickel and cobalt prices in 1H23, we lower our 2023 and 2024 attributable net profit forecasts 15.3% and 24.8% to Rmb6.43bn and Rmb9.29bn. The stock is trading at 13.5x 2023e and 9.3x 2024e P/E.
　　We maintain OUTPERFORM rating. Despite the lower earnings forecasts, we remain optimistic about the firm's nickel and lithium business growth in 3Q23, given the recent bottoming-out of cobalt prices. We cut our target price 9.6% to Rmb68.13, implying 18x 2023e and 12x 2024e P/E, offering 34% upside.
　　Risks
　　Sharper-than-expected decline in metal prices; disappointing progress of projects in Indonesia; disappointing AFV sales.
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   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。