Morningstar Analyst Zhao Hu believes Jiangxi Copper Co Ltd’s (HKG:0358) self-sufficiency will be lower this year. He says the decrease will be due in part to the fact that the company is owned by the provincial government, which he says is designed to maximize size and tax revenue, but not returns and economic profit.
“So what that means is they are going to continue to expand its copper refining and smelting business in order to sustain leading market shares of refined copper in China,” Hu says. “But as we know, refinery does not make a very good return or profits on its investments compare to its mining business, so as China consumes more and more copper, the company is going to build more and more refineries.”
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Hu says Jianxgi Copper’s mining output has been growing in the low-single digits, while its refinery capacity has grown at double digits for the past five years. That, he says, is why he expects a lower self-sufficiency ratio going forward.
“And what this does is the company’s margin is going to come under pressure as a lot more of its revenues are coming from the lower margins business,” Hu says. “And that will dampen the company’s earnings going forward.”
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