By the east wind of the reform of central enterprises, the leading value of metallurgy is to be reassessed

1. Company profile: the world's largest metallurgical construction contractor

1.1 Metallurgical construction leader, multi-plate coordinated development

Historical evolution

The company was formerly known as China Metallurgical Construction Corporation, which was approved by The State Council in 1982. It belongs to the Ministry of Metallurgical Industry and is a window company specializing in the development and operation of overseas engineering market. In 1994, with China Metallurgical Construction Corporation as the core, the Economic and Trade Commission and the Ministry of Metallurgy set up the MCC Group in the form of an enterprise consortium with some of its affiliated design institutes, survey institutes and construction enterprises. MCC was founded in 2008 by MCC Group and Baowu Iron and Steel Co., LTD., and successfully listed in Shanghai and Hong Kong in 2009. In the early days of its establishment, the company has undertaken the construction of the main production facilities of almost all large and medium-sized iron and steel enterprises in China, and is the main force in the construction of China's steel industry. After years of development, MCC has become the world's largest metallurgical construction contractor and metallurgical enterprise operation service provider, occupying an absolute leading position in the domestic steel market. In 2016, the company proposed the development strategy of "to be the national team of metallurgical construction, the main force of capital construction, the leader of emerging industries, and adhere to the road of high-tech construction for a long time", based on the traditional business advantages of metallurgy, while actively developing construction engineering, resource development, equipment manufacturing and real estate development sectors, and is expected to create a diversified business layout of "four beams and eight pillars" coordinated development.

Ownership structure

It belongs to Minmetals Group, and SASAC is the actual controller. As of the end of 2023Q1, the direct largest shareholder of the company is China Metallurgical Group Co., LTD. (MCC Group), with a shareholding ratio of 49.18%. In May 2020, CNPC accepted the free transfer of about 122,800 shares of the company from MCC Group, accounting for 5.92% of the total shares. In December 2015, MCC Group and China Minmetals Group were approved by The State Council to implement strategic restructuring, MCC Group became a wholly-owned subsidiary of Minmetals Group, Minmetals Group is directly supervised by the SASAC, SASAC is still the company's actual controller. The company's subsidiaries are mainly involved in engineering contracting, equipment manufacturing, resource development and real estate development four business segments.

1.2. The operating performance improved in quantity and quality, and the newly signed orders increased steadily

From the perspective of historical revenue and performance, the company's development can be roughly divided into the following three stages: In the first stage (rapid development period, before 2012), since 2010, in the context of the national macro-control policy restricting the new capacity of the iron and steel industry, in order to hedge the downward pressure on investment in metallurgical construction, the company actively explored non-metallurgical engineering construction industry and resource development emerging industries, with rapid revenue growth. CAGR reached 20% from 2006 to 2011. The second stage (performance downturn period, 2012-2016) : In 2012, due to the sharp decline in polysilicon prices and partial suspension of production of Yingkou Company, the company's resource development and equipment manufacturing business suffered large losses, and the addition of large asset impairment provisions and other factors caused the company's performance to fall by 264% in the same year. In 2013, the company's new management took office and proposed the development strategy of "focusing on the main business, moderate multi-yuan" and the business layout idea of "four beams and eight pillars", and the company entered the transformation period of comprehensive business layout. The third stage (steady growth period, 2017-present) : In 2017, the company's resource business turned a loss into a profit, metallurgical orders recovered strongly, non-metallurgical orders benefited from the company's layout in PPP and new infrastructure to achieve steady growth, and the company's revenue returned to a high growth rate since 2017, with a compound growth rate of 19.4% from 2017 to 2022.

ROE has stabilized and rebounded, and the quality of earnings has continued to improve. Since the trough in 2012, the company's return on equity has increased year by year, from 7.0% in 2013 to 9.0% in 2022. From the perspective of DuPont analysis, the improvement of net interest rate and total asset turnover is the main driving force for the improvement of ROE. While the company's ROE increased, its asset-liability ratio decreased year by year. In 2022, the company's asset-liability ratio was 72.3%, which was significantly reduced by 11.5 pct compared with 2012. The pressure reduction measures of the two gold and steel companies achieved remarkable results, and the capital structure continued to optimize.

New signed orders increased steadily, and the proportion of non-steel continued to increase. In 2022, the company's newly signed contracts reached 1,343.6 billion yuan, an increase of 11.5%, and the compound growth rate in the past five years reached 17.4%, with steady growth. From the perspective of order structure, the proportion of non-steel orders continued to increase, and the proportion of non-steel orders in 2022 reached 85%, a significant increase of about 22 pct compared with 2013. In non-steel orders, housing construction/infrastructure/other projects accounted for 53%/18%/15% of the total orders, with a year-on-year growth rate of 9%/-6%/53%, and other engineering orders grew faster, which is mainly expected to be driven by the upward demand for new energy projects.

1.3. Build a "four beams and eight pillars" business system with engineering construction as the core

Engineering construction is the core business of the company, and the strategy of "four beams and eight pillars" continues to advance. The main business of the company is divided into engineering contracting, housing, land and production development, installation and manufacturing, and resources development and development of four major blocks, the proportion of revenue in 2022 is 92.9%/3.8%/2.1%/1.5%, and the project contracting business contributes the main revenue. The company proposes to take the four core businesses as "beams", metallurgical engineering, high-end housing construction, medium and high-end real estate, transportation and municipal infrastructure, mine construction and mineral development, core technical equipment and steel structure, environmental engineering and new energy, and characteristic theme projects as "columns", to create a comprehensive business layout of "four beams and eight columns", and gradually advance with the "four beams and eight columns" strategy. The company's business structure is expected to continue to diversify. 

1) Engineering contracting business: The company's engineering contracting business consists of metallurgical engineering and non-steel engineering construction business, and non-steel engineering mainly includes housing construction, infrastructure construction and emerging industries. In 2022, the proportion of metallurgical and non-steel engineering revenue in the total revenue of project contracting is 24%/76%, respectively, and the proportion of housing construction/infrastructure construction/emerging industries in non-steel engineering is about 68%/25%/7%. The company's emerging industries mainly involve ecological environmental protection, characteristic engineering, health care, new energy and inspection and testing five plates.

2) Equipment manufacturing business: The company's equipment manufacturing sector mainly includes two aspects: equipment manufacturing and steel structure business. The equipment manufacturing sector is dominated by metallurgical equipment, and has a number of core manufacturing bases such as CCID, MCC Shaanpress, MCC Changtian Heavy Industry, and MCC Nanfang. The products cover the main metallurgical process key equipment such as sintering pellets, iron and steel making, casting and rolling, and are widely used in large international and domestic steel engineering projects. In terms of steel structure manufacturing, the company is one of the largest steel structure manufacturing enterprises in China, with a total layout of 32 steel structure manufacturing bases, and the base's own design capacity reaches 1.65 million tons, ranking the forefront of the same industry in the country.

3) Resource development business: Resource development business is mainly concentrated in the fields of nickel, cobalt and other metal minerals mining, mineral processing, smelting, etc. The average annual profit of this business segment has been about 710 million yuan since 2017, and the profit will be 1.58 billion yuan in 2022, with relatively high performance flexibility.

4) Real estate development business: The company is one of the 16 central enterprises whose main business is real estate development first identified by the State-owned Assets Supervision and Administration Commission of the State Council, and mainly operates real estate development business through its subsidiary MCC Real Estate. Subject to the gradual relaxation of real estate regulation policies, the sector turned a loss into a profit in 2022, with a net profit of 170 million yuan. In the future, the company will actively explore financing models while accelerating the storage of high-quality land in key regions, increase strategic land reserves by old city transformation, regional development, headquarters economy and other ways, and build a comprehensive real estate development and operation business sector.

2. Valuation catalysis: The "national reform and the Belt and Road" intensified, and the resource sector urgently needs to be reassessed

2.1. The "Zhongspecial valuation system" is timely, and the market value of the central state-owned enterprises is expected to increase

The valuation system with Chinese characteristics is of great significance for enhancing the equity value of state-owned enterprises. At the Financial Street Forum in November 2022, the Chairman of the China Securities Regulatory Commission proposed to "grasp the valuation logic of different types of listed companies and explore the establishment of a valuation system with Chinese characteristics." In December of the same year, the Shanghai Stock Exchange issued the Three-year Action Plan on Comprehensive Service for Central Enterprises, from 1) promoting the valuation of central enterprises to a reasonable level; 2) Cooperate with the State-owned Assets Supervision and Administration Commission of the State Council to carry out the professional integration of central enterprises; 3) Actively serve and improve the three aspects of the modern enterprise system with Chinese characteristics to improve the quality of listed companies controlled by central enterprises. Under the background that local land finance is under great pressure and it is urgent to find new revenue channels to hedge land finance, it is of great significance to promote the valuation of state-owned enterprises to return to a reasonable level and enhance the equity value of state-owned enterprises to ensure local financial security. The market value of listed state-owned enterprises is large, the valuation is low, and the equity value is large. From the market value distribution of A-share listed enterprises, the total market value of central state enterprises is 43 trillion yuan, accounting for 49%, and the market value scale is the largest among listed enterprises with various attributes. As of 2023/7/31, PE/PB distribution of central soes was only 9.7/0.98 times, and that of local soes was only 15.5/1.60 times, significantly lower than that of private enterprises, which was 25.4/2.96 times. From the historical trend of valuation, the central state-owned enterprises can obtain a high valuation similar to that of private enterprises from 2006 to 2008, but after 2009, the valuation of central state-owned enterprises continues to be at a low level, and the upward recovery potential is large.

Detailed policies continue to be introduced to guide the management quality of central state-owned enterprises to improve and enhance the market value of the driving force. Recently, the SASAC held a meeting of central enterprise leaders to clarify that in 2023, the central enterprise "one profit five rate" target is "one increase, one stability and four improvements", compared with the 2022 "two profit four rate" assessment system and the "two increases, one control and three improvements" goal, in 2023 SASAC added ROE and operating cash ratio as central enterprise assessment indicators. It is expected to guide the national central enterprises to downplay the scale and pursue the actual management quality improvement. This round of assessment system is closer to the capital market standards, which is expected to unify the important interests of supervision and the market, and better stimulate the revaluation and return of the value of state-owned listed companies. At the same time, driven by a new round of state-owned enterprise reform, it is expected that more central state-owned enterprises will introduce equity incentive measures in the future, more diversified incentive methods such as options, dividends, and the transformation and sharing of scientific and technological achievements are expected to land, and the market value is expected to further enhance.

2.2. The "Belt and Road" strategy is advancing, and the leader is gaining momentum to travel further

The strategic significance of the Belt and Road Initiative in the new era has been enhanced, and the 10th anniversary is gathering momentum. The Belt and Road Initiative was proposed in 2013 and written into the Party Constitution in October 2017, making it of great strategic importance. As one of the national key high-level strategies, the "Belt and Road" will be endowed with new significance in the new era: on the one hand, it will help China further strengthen and stabilize cooperation with neighboring countries, maintain regional stability, and ensure China's national security; On the other hand, it is expected to better promote the implementation of the domestic and international double cycle strategy, accelerate the output of domestic advantageous production capacity, and is expected to increase its strength in the future. In 2017 and 2019, China held two Belt and Road Forum for Cooperation, which achieved fruitful results in five major areas: policy coordination, infrastructure connectivity, unimpeded trade, financial integration and people-to-people ties. In 2023, China is considering holding the third Belt and Road Forum, which coincides with the 10th anniversary of the "Belt and Road" initiative, which is a milestone and is expected to promote more cooperation agreements and support policies. As China's strong point, infrastructure engineering has a global competitive advantage and is an important carrier for the promotion of the Belt and Road cooperation. It is expected that under the promotion of relevant policies, the demand for overseas projects will accelerate the recovery.

The scale of overseas revenue of central enterprises is leading, and it is the leader of engineering going to sea. Large central enterprises have rich experience in foreign economic exchanges, and have strong international competitiveness in some industries such as infrastructure construction, high-speed rail, and nuclear power. In addition, the strategic positioning and main direction of attack are very clear, usually select key areas and countries or regions, and screen major projects, and the ability to resist risks is also high. From the perspective of overseas revenue volume, the scale of overseas business of large construction central enterprises is significantly ahead, as the main force of China's "Belt and Road", construction central enterprises have significant advantages in the traditional power, new energy, metallurgy, chemical and other professional engineering fields, is expected to benefit from the core overseas engineering demand, and is expected to bring valuation catalysis to the plate.

Metallurgical engineering is a traditional advantageous industry in China, and the demand potential of the "Belt and Road" region is great. As China's manufacturing advantage industry, the steel industry is a key area to expand international production capacity cooperation, and is also a basic industry to provide raw material guarantee for the "Belt and Road" infrastructure connectivity. In the global steel demand growth overall slowing down trend, participate in the "Belt and Road" Southeast Asia, South Asia, Central and Eastern Europe, West Asia and North Africa and other regions and countries of steel demand still has greater growth potential, some regions are in the accelerated development of industrialization, infrastructure and energy and other equipment manufacturing development to bring a large number of steel demand, metallurgical engineering construction demand is expected to rise.  As the world's largest metallurgical construction contractor and operator of metallurgical enterprises, MCC has mastered the key technologies and processes in the fields of intelligent blast furnace smelting, mineral resources development, steelmaking equipment manufacturing, etc. The steel projects it has undertaken account for more than 63% of the world's steel market and has metallurgical construction projects in nearly 30 countries and regions around the world. Benefiting from the advancement of projects along the "Belt and Road", overseas orders are expected to resume rapid growth.

2.3. The company is rich in mineral resources and its business value needs to be reassessed

Mineral reserves are abundant, and the resources sector is expected to contribute to profit elasticity. The company's resource development business mainly involves the mining, beneficiation and smelting of nickel, cobalt, copper, zinc, lead and other metal mineral resources. According to the company's annual report, the company's mineral resources mainly have three mines in production, rich resource reserves, and the project mining period can reach 20 years. Papua New Guinea Rimu Nickel-Cobalt Project: It is the mine with the highest production rate and operation level among the laterite nickel mines that have been put into production in the world. The estimated resources of the project are 150 million tons, the average grade of nickel is 0.85%, the average grade of cobalt is 0.09%, equivalent to 1.29 million tons of nickel metal and 140,000 tons of cobalt metal. It can basically meet the needs of the project for 40 years of smooth operation and 20 years of doubled production capacity. Duda lead-zinc mine project in Pakistan: The estimated amount of zinc metal in the project is 850,000 tons, the amount of lead metal resources is 400,000 tons, the average grade of zinc is 7.81%, the average grade of lead is 3.61%, which can basically meet the stable operation of the project for nearly 20 years. Shandak copper-gold project in Pakistan: The estimated reserves of the east ore body of the project are 348 million tons, the average grade of copper is 0.36%, equivalent to 1.29 million tons of copper metal; The reserves of 75.49 million tons, the average grade of copper 0.375%, equivalent to 283,100 tons of copper metal, according to the reserves, can basically meet the stable operation of the project for 20 years.