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Xiamen Tungsten:Short of rare earth reserves;initiating with

作者:ihpa.net 发布时间:2017-10-13

Core business faces sluggish demand; initiating with Sell

Xiamen Tungsten is a leading player in the tungsten industry and also one ofthe six major rare earth groups in China. With the depletion of its own rareearth mine and potential intense competition in downstream magnets, weexpect only limited margin improvement in its rare earth segment. With regardto its core tungsten business, we are cautious about the demand outlook. Itsnon-core property business might be a major profit contributor in the nearterm, in our view. Overall, we expect significant downside to consensusearnings, and we initiate coverage with a Sell rating and a target price ofRMB12, implying 16% downside potential.

Competitiveness yet to be proven in rare earth industry

Despite Xiamen Tungsten’s good position as one of the six major rare earthgroups in China, the company purchases all raw ores from external suppliers,as its own mines are depleting. The concern of being a pure smelter has sent itmarching downstream. Although we are positive on overall magnet demandgrowth, we are cautious about its new magnet business as: 1) it takes years tocertify magnet quality; and 2) the competitive landscape in the magnet spaceis intense. Without new mine resources, and given issues facing its magnetbusiness, we expect limited margin expansion in its rare earth business.

No signs of meaningful demand recovery in tungsten industry

We like Xiamen Tungsten as a leading and quality player in the tungstenindustry, with activities ranging from mining and smelting to high-endcemented carbide processing. We also believe the current tungstenconcentrate price is at its lows. However, we do not expect a meaningfuldemand recovery as a consequence of: 1) the destocking activities of ex-Chinaend-users in the near term, resulting from the removal of the Chinese exportquota; and 2) sluggish demand from manufacturing sectors and a weak capexcycle in China (cemented carbide/super alloys account for c.54%/c.28% oftungsten demand).

Initiating with Sell and 23% downside potential; major risks

We use DCF (8.3% WACC and 2% tgr) to derive our target price of RMB12.0,which translates into 54x/32x 2016/17E EPS and ~1.7x 2016E BVPS. The stockcurrently trades at 65x/38x 2016/17E EPS and 2.0x/2.0x 2016/17E BVPS. Withonly c.3%/5% ROAE in 2016/17E, we believe its current valuation isunsustainable. Upside risks: stronger tungsten price recovery; Better-thanexpectedperformance in property sector; Stronger magnet demand and fastermagnet capacity expansion; Better-than-expected lithium-ion materialsdemand; RMB depreciation vs. USD would also lift its earnings as exportsaccount for ~30% of its total sales.

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