Metallurgical construction leading, mineral resources development potential



Company profile: Metallurgical construction leader, keep out of new development

Based on metallurgical engineering, back to China Minmetals

The world's largest metallurgical construction contractor and metallurgical enterprise operation service provider. The full name of MCC is China Metallurgical Engineering Co., LTD., which is the world's largest metallurgical construction contractor and metallurgical enterprise operation service provider, one of the key resource enterprises identified by the State, the steel structure production enterprise with the largest production capacity in China, and one of the 16 central enterprises identified by the State-owned Assets Supervision and Administration Commission of the State Council as the main business of real estate development. The company's main business includes engineering contracting, real estate development, equipment manufacturing and resource development. In the "Top 250 Global Contractors" (ranked by total turnover) released by ENR in 2022, MCC ranked 6th, unchanged from the previous year, and in the "Top 250 International contractors", MCC ranked 47th, up 6 places from the previous year.

Back to Minmetals Group, strategic integration and re-plastic core competitiveness. In 2015, MCC and China Minmetals Group Limited (referred to as "China Minmetals") began to implement strategic restructuring, and MCC was integrated into China Minmetals. Minmetals Group takes metal minerals as its core business, has rich mineral resources reserves around the world, and has strong trade logistics capabilities and financial operation capabilities. The company is backed by Minmetals Group, and with the deepening of strategic integration, it is expected to receive more support in overseas expansion and investment and financing.

Around the main business of engineering, the performance increased steadily

Strong base, focus on core advantages to build. China MCC adheres to the strategic positioning of "being a world-class metallurgical construction national team, the main force and vanguard of capital construction, the leader and vanguard of emerging industries, and long-term adherence to the road of high-tech and high-quality innovation and development", and vigorously develops the "four beams and eight pillars" business system and product positioning. "Four beams" is metallurgical construction, engineering contracting, emerging industries, comprehensive real estate four business segments; The "Eight pillars" include metallurgical and mining engineering, equipment manufacturing and steel structure, housing and infrastructure engineering, mineral development, comprehensive real estate and other engineering services and products.

Focusing on the main business of engineering, revenue and profit achieved steady growth. In 2022, the company achieved operating income of 592.67 billion yuan, an increase of 18.4%, and gross profit of 10.27 billion yuan, an increase of 22.7%. From 2017 to 2022, the company achieved a compound growth rate of 19.4% in operating income and 11.1% in gross profit. From the perspective of business structure, the revenue and gross profit of the company's engineering contracting business have increased, and the proportion of project contracting revenue from 2013 to 2022 has increased from 80% to 93%, and the gross profit composition has increased from 75% to 86%.

The newly signed engineering orders increased steadily, and the proportion of non-steel business was high. The amount of new contracts signed by the company maintained a steady growth. In 2022, the amount of new contracts signed by the company was 1,345.57 billion yuan, an increase of 11.7%. In 2023, the amount of new contracts signed by the company was 421.31 billion yuan, an increase of 3.8%. From the perspective of order structure, metallurgical engineering accounted for 14%, and housing construction and infrastructure accounted for 71%, constituting the main part of the company's engineering orders.

Gross profit margin is under pressure as a whole, and the profitability of resource development business is strong. Due to the low entry barriers to non-steel engineering business and fierce competition in the industry, the gross profit margin of the company's engineering contracting has continued to decline, driving the overall gross profit margin to show a continuous downward trend. The company's gross margin in 2022 was 9.6%, down 1.0 percentage points from the previous year and down 4.0 percentage points from 2013. In terms of business, the gross profit margin of the company's engineering contracting/real estate development/equipment manufacturing/resource development business in 2022 is 9.0%/11.1%/11.6%/36.3%, respectively. In addition to the project contracting business, the real estate development business was affected by the downturn of the industry prosperity, and the gross profit margin decreased significantly; Equipment manufacturing gross profit margin to maintain a stable level; The profitability of resource development business is strong, and the gross profit margin continues to improve.

The debt burden is light, and the quality and efficiency of operations continue to improve

ROE is steadily improving, net margin is under pressure, but turnover continues to accelerate. In 2022, the diluted ROE of the company is 8.48%, which is slightly lower than that of similar construction central enterprises China Railway Construction and China Chemical. Compared with peers, the company's net interest rate was under pressure, and the asset-liability ratio fell below 75%, but the total asset turnover ratio bucked the trend and continued to increase.

Cost control achieved good results, and R&D investment continued to strengthen. The company continues to strengthen the control of period expenses, and the ratio of sales, management and financial expenses has been effectively reduced. In 2022, the company's period expense ratio will be 5.71%, down 0.41pct from the previous year, among which the management expense ratio will be 5.06%, down 0.30pct from the previous year, and the sales expense ratio will be 0.49%, down 0.06pct from the previous year. Finance expense ratio was 0.16%, down 0.05pct from the previous year. The company continues to increase investment in research and development, and the R&D expense rate in 2022 is 3.16%, mainly investing in intelligent and green technology innovation, and the technology is at an advanced level in the field of integrated pipe corridor, sponge city and smart city.

Project investment is cautious, and the corresponding proportion of investment assets is low. The company's participation in PPP and other construction modes is relatively low, and the corresponding proportion of investment assets is relatively low. By the end of 2022, the company's long-term receivables/licensed rights/other non-liquid assets/other non-current assets within a year are 358/169/71/0 billion yuan, respectively. The four projects total 59.8 billion yuan, accounting for 10.2% of the total assets, which is significantly smaller than other central construction enterprises in terms of investment scale and proportion.

The proportion of interest-bearing liabilities is lower than that of peers, and the debt burden is light. As the company's engineering investment is weak, the corresponding financial pressure is small, and the interest-bearing debt ratio continues to decline. In 2022, the company's game debt ratio is only 14.9%, significantly lower than the 36.2%/35.6%/26.1% of China State Construction/China Railway/China Railway Construction. The low debt ratio of the game corresponds to the continuous decline of financial expenses, and the company's financial expense ratio is only 0.16% in 2022, and the annual financial expense is only 940 million yuan.

Cash flow continues to be positive, with downward pressure on the operating cash ratio. In 2022, the net operating cash flow was 18.15 billion yuan, and the operating cash ratio was 3.18%. After 2020, affected by changes in the industry environment, the company's cash flow has a weakening trend, and the revenue ratio and cash payment ratio decline in the same direction, and the revenue ratio will be 88.0% and the cash payment ratio will be 83.6% in 2022.

Metallurgy to build a national team, emerging business to create a characteristic brand

There is a wide space for capacity replacement and technological transformation, and the technical advantages of the metallurgical construction national team are stable

The demand side is weak, and the crude steel production continues to decrease. The real estate industry downstream of steel production continues to be depressed, real estate development investment is weak, manufacturing investment is in a weak recovery state, and steel demand is declining. In 2022, China's steel consumption was 920 million tons, down 3.1% year-on-year. On the supply side, the policy insists on reducing crude steel production, and China's crude steel production will be 1.02 billion tons in 2022, a decrease of 47 million tons from 2020.

The green and low-carbon development of steel has spawned the demand for stock market transformation, and metallurgical engineering still has market space. The carbon emissions of China's steel industry account for about 15% of the country's total carbon emissions, and it is the largest carbon emission industry among 31 categories of manufacturing. In the iron and steel industry, the long process structure of blast-converter is dominant, coal and coke account for nearly 90% of energy input, and the carbon emission density in the production process is large. In the context of "carbon neutral" policy, the concentration of the steel industry will continue to increase, carbon emission limits will gradually upgrade, environmental protection efforts will continue to increase, and the low-carbon intelligent transformation of steel production lines is expected to become the "just need" of steel enterprises in the future.

The policy encourages steel capacity replacement and enterprise merger and reorganization. From June 1, 2021, the new version of the Implementation Measures for Steel Industry Capacity Replacement issued by the Ministry of Industry and Information Technology (hereinafter referred to as the "new Measures") began to be implemented. The new measures point out that the construction of iron and steel production capacity must be replaced respectively, and the total steel production capacity is strictly prohibited in key areas of air pollution prevention and control. At the same time, in order to encourage enterprise merger and reorganization and improve industrial concentration, preferential replacement ratio is given to the compliance capacity obtained after the completion of merger and reorganization.

The new measures encourage green and low-carbon development of the industry and innovation in process technology. The new method allows the implementation of equal replacement in six categories (that is, the maximum replacement ratio can reach 1:1) : (1) the enterprise internally exits the construction of converter electric furnace and exits the steelmaking capacity of the supporting sintering, coke oven, blast furnace and other equipment projects. (2) The withdrawal and construction of smelting equipment are electric furnaces. (3) Do not change the type of smelting equipment, capacity (volume), the number of technical renovation projects within the plant. (4) Withdraw from supporting sintering, coke ovens, blast furnaces and other equipment to build hydrogen metallurgy and Corex, Finex, HIsmelt and other non-blast furnace ironmaking projects. (5) The steelmaking capacity of stainless steel produced by rotary kiln-ore furnace -AOD furnace process. (6) Iron and steel smelting projects in Qinghai and Tibet. The company has rich metallurgical technology accumulation and focuses on core process research and development. The electric arc furnace steelmaking technology developed by CCID, a subsidiary of the company, can reduce the power consumption of scrap steel smelting to 250kWh/t, and all indicators have reached the world advanced level. Compared with the traditional long process process, carbon emissions can be reduced by 65%, and carbon emissions can be reduced by 11% compared with conventional electric arc furnace. MCC Jingcheng, a subsidiary of the company, has rich basic research experience in the field of hydrogen metallurgy, and is currently implementing a major project of "Research and industrial demonstration of key process technologies for hydrogen rich low-carbon smelting in blast furnaces", which is expected to promote the traditional process to reduce carbon by 10% and achieve large-scale carbon reduction in steel.

The newly signed revenue of metallurgical engineering maintained growth, and the status of the metallurgical construction national team was stable. Benefiting from the continuous release of demand for steel capacity replacement and intelligent and low-carbon transformation, the company's metallurgical engineering orders and revenue maintained rapid growth. In the past five years, the compound growth rate of the company's newly signed metallurgical construction contracts was 19.5%, and the compound growth rate of operating income was 21.9%. In 2022, the company's metallurgical engineering business completed the newly signed contract amount of 192 billion yuan, an increase of 21.7%, and achieved operating income of 129.6 billion yuan, an increase of 12.5%.

Equipment manufacturing and steel structure opened up the upstream and downstream of metallurgical construction, and equipment manufacturing business grew steadily. The company has a number of core equipment manufacturing bases, products covering sintering pellets, iron and steel making, continuous casting and rolling of steel and other metallurgical process key equipment, widely used in international and domestic large-scale steel engineering projects. At the same time, the company is one of the largest steel structure manufacturing enterprises in China, with 32 steel structure manufacturing bases, the design capacity of 1.65 million tons, the capacity scale of the industry leading. In 2022, the company's equipment manufacturing business achieved operating income of 12.32 billion yuan, an increase of 6.0%, and gross profit of 1.43 billion yuan, a decrease of 18.8%.

The moderate extension of "MCC characteristics" creates a moat in the non-steel field

Non-steel engineering new contracts and revenue growth. The company actively expands its business in the field of non-steel engineering. In 2022, the company's new contract value of non-steel engineering will reach 1,087.1 billion yuan, accounting for 86% of the new contract value of the project, and the operating income will reach 420.8 billion yuan, accounting for 74% of the project revenue. The company's non-steel engineering fields mainly include housing construction, transportation infrastructure projects and others. In the past three years, the compound growth rate of newly signed contracts for housing construction/infrastructure was 21.7%/17.3%, and the compound growth rate of operating income was 16.1%/25.0%.

"MCC Gene" injected into emerging industries, differentiated competition to create a characteristic engineering brand. Based on its own metallurgical construction advantages, the company has deeply cultivated a number of subdivided engineering fields and established a number of professional technical research institutes. In terms of business, based on the advantages of metallurgical wastewater treatment technology, it has entered the field of ecological and environmental protection engineering, based on the comprehensive design capability of the park, it has entered the field of theme park construction, and undertaken a series of major projects such as the ecological and environment-oriented development project (EOD) of the Huangshi section of the Yangtze River, the Beijing Universal Studios project, and the Shanghai Disneyland project, successfully creating differentiated competitive advantages.

Real estate business adhere to steady operation, sales are expected to recover. In 2022, the sales area and sales of MCC Real Estate, the main operating body of the company's real estate business, declined by 49.5% and 41.8% year-on-year, and the operating income of the real estate business reached 22.73 billion yuan, an increase of 6.1% year-on-year, with the revenue/gross profit ratio of 3.8%/4.4%. From January to April 2023, the company's sales area/sales increased by 9.3%/17.3% year-on-year, showing a recovery trend. The company's real estate business adheres to the high-end line, creating three high-end residential product lines in the Beijing-Tianjin-Hebei "Dexian system", the Yangtze River Delta "Jinxiu system" and the Pearl River Delta "Yijing System". In the past, the company's real estate business has always maintained a revenue scale of about 20 billion yuan, actively avoided blind expansion, and the overall drag on the company is limited during the downturn of the real estate business.

The resource development business is bright, and the incremental minerals are worth looking forward to

Resource reserves are sufficient, and overseas development projects are progressing steadily

Overseas mines are rich in resources, and the volume and price rise help the scale increase. At present, the company has three production mines and one polysilicon production base, and the revenue of resource development business in 2022 is 8.87 billion yuan, an increase of 33.0%. The Company's main mineral resources include nickel, cobalt, copper, lead and zinc, benefiting from rising resource prices, while stable production in hand mines, fast mining and fast selling, and resource development business achieved rapid operating income growth for two consecutive years. In 2022, due to the decline in resource prices, the gross profit margin of resource development decreased by 6.4 percentage points to 36.3%, but it still remained at a high level.

Nickel and cobalt mines account for 60% of profits, and the countries where the mines are located are politically stable. In 2022, the net profit of the Ruamu nickel and cobalt mine in Papua New Guinea, the Duda lead and zinc mine in Pakistan and the Shandak copper and gold mine in Pakistan will reach 1.27 billion yuan, 280 million yuan and 130 million yuan respectively, accounting for 60%, 14% and 6% of the resource development business. Papua New Guinea, where the company's nickel and cobalt mines are located, pursues a policy of diplomatic neutrality, and the bilateral trade volume with China in 2022 is 5.26 billion US dollars, up 30.8% year-on-year. Pakistan, the country where the company's copper, lead and zinc mines are located, is a "good-neighborly country" of China and has carried out in-depth cooperation with China in many fields. The company and the local government have the possibility of continuing to deepen cooperation in mineral development in the future.

Nimu nickel-cobalt project in Papua New Guinea

The Ruimu Nickel-Cobalt project is located in Madang Province, Papua New Guinea. It is a world-class mining project integrating mining, mining and smelting. The project consists of laterite open-pit mining, pipeline slurry transportation, high pressure acid leaching hydrometallurgy, deep-sea tailings discharge and other main processes and supporting facilities. The company indirectly holds 57% of the equity of the project, which produces nickel-cobalt intermediate products with a metal equivalent of about 31,000 tons/year of nickel and 3,000 tons/year of cobalt. The project was completed in 2012 and entered production in the same year. In 2022, the project will produce 34,302 tons of nickel and 2,987 tons of cobalt, reaching a yield of 105%, achieving a revenue of 4.746 billion yuan and a net profit of 1.267 billion yuan.