IRC Ltd Bloomberg: (1029 HK)...1 Evaluateresearch.com After the first nine months of 2019, K&...

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IRC Ltd

Bloomberg: (1029_HK) Mining

November 22, 2019

Management Call: Strong Operating Results 100% Capacity Utilization For K&S After the first nine months of 2019, K&S mine of IRC successfully operated at 100% capacity in the month of October 2019 after resolving some of the remaining production bottlenecks. During October, 2019 264,000 tons of iron ore concentrate was produced, equivalent to 100% of the plant’s annualized production capacity. This encouraging performance reflects the achievement of a major milestone in the history of K&S and the immediate plan now is to stabilize operations at this high production rate. IRC’s production and sales volumes increased by 10.5% and 9.7% respectively in the first nine months of 2019. K&S produced 1,880,894 tons of iron ore concentrate, which represents an annualized production rate of 78%. During the third quarter, K&S operated at high production rates in the month of July and September, achieving monthly production capacities of 85% and 95% respectively. However, production in August was affected by exceptionally heavy rain and this unusual weather condition was severe enough for the local government to declare a state of emergency. This resulted in a lower quarterly production rate of 77%. The rainstorms have passed and K&S’s operations are now back to normal. As the company has now achieved 100% capacity utilization it is assessing an option to upgrade the phase I production facility to increase the production capacity to about 4.6 mn tons per annum (existing 3.2 mn tons per annum) with a capital expenditure requirement of about US$50 mn. The total capacity that has been designed for phase I and phase II combined stands at 6.3 mn tons per annum which indicates there is room for expansion even if full utilization is achieved on the 4.6 mn tons capacity. The increase in capacity will allow the revenue growth momentum to continue for the next few years as well. During our conversations with management they mentioned that with the current capacity utilization at 100% since October, the company plans to stabilize production at current levels before undertaking any capacity expansion for K&S phase I and phase II.

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Target Price HK$ 0.21

Current Price HK$ 0.12

Upside Potential 75%

Rating BUY

Market Cap. HK$ 816 mn

US$ 104 mn

Shares Outstanding 7,093.4 mn

Free Float (FF %) 68.9%

52 Week Range (HK$) 0.24 / 0.043

Avg. Daily Value HK$ 0.5 mn

HANG SENG Index

Level 26,536

Insider Holding % 31.1%

Risk: Above Average

Forecasting and Valuations

(US$ mn except ratio) FY 2019E FY 2020E

Revenue 191 224

Net Income -21 33

EPS (cents) -0.29 0.47

EBITDA 32 68

PE NA 4

EV/EBITDA 11 5

P/B 0.51 0.46

Analysts:

Ketan Chaphalkar

[email protected]

Sandy Mehta, CFA

[email protected]


HK$0.21 PT; 75% Upside IRC stock is up 20% since our initiation of coverage on the company in September 2018 at HK$0.12. In view of the production from the K&S mine reaching full capacity along with a reduction in cash costs of upto US$5/ton due to the completion of the Amur River Bridge, followed by reduced cash outflows due to refinancing of the ICBC loan by Gazprombank facility, we maintain our price target on IRC of HK$0.21 per share implying an upside of 75% over the current stock price of HK$0.12. Our price target implies a P/E multiple of 6x on our FY2020 EPS estimate of US$0.47 cents and an EV/ EBITDA multiple of 6X on our FY2020 EBITDA estimate of US$68.1mn. Investors should note the stock did trade as high as HK$0.23 as recently as June 2019. The stock trades at a FCF yield of 18.4% based on our FY2020 free cash flow estimate of US$24.9mn. At the current levels, the stock is trading at extremely attractive multiples of just 4x P/E and 5x EV/EBITDA based on our FY2020 EPS and EBITDA estimates, respectively. Cash Flow Position to Improve on 100% Capacity Utilization As per the Gazprombank Facility, the prepayment schedule of the loan is aligned with the ramping up of the capacity of the K&S mine which would improve the cash flow position of the company and provide a stable financial platform to consolidate its market position. Now with 100% capacity utilization achieved, the loan prepayment would reach its peak levels and improve IRC’s cashflow position in the longer time horizon. The initial outflow of cash after maintaining 100% utilization rate would be higher as compared to the outflow during times of lower utilization rates, but it would reduce future cash outflows proportionately due to preponement of payment. This will help IRC in reducing its future liabilities and help improve free cash flow. In September 2019, a total of US$10.3m was paid to Gazprombank as principal repayment and interest. The total debt outstanding as of 30th September 2019 was US$230 mn and the total cash and deposit balance was US$9 mn. ICBC had initially financed the operations of the K&S mine but the prepayment of loans was not aligned with the ramp up in production capacity for the company. IRC then decided to refinance the same with Gazprombank and finalized the arrangement. The purpose of the Gazprombank Facility [Total US$240mn; Secured: US$160mn and Unsecured: US$80mn] was to repay the bank loan from ICBC in full of approximately US$169mn and to use the remaining amounts for the following purposes: (i) to repay the bridge loans advanced by Petropavlovsk in full of approximately US$57mn; (ii) to finance K&S’s working capital in the amount of approximately US$8mn and (iii) to repay the guarantee fee of approximately US$6mn to Petropavlovsk in respect of the ICBC Facility. As mentioned, the Gazprombank Facility prepayment schedule of the loan is aligned with the ramping up of the capacity of the K&S mine which would improve the cash flow position of the company.


The Gazprombank Facility will mature in 2026 and it consists of two tranches. The principal under the first tranche amounts to US$160mn with interest being charged at 5.7% above LIBOR per annum and is repayable in equal quarterly payments during the term of the Gazprombank Facility. The principal under the second tranche amounts to US$80mn with interest being charged at 7.7% above LIBOR per annum and is repayable at the end of the term of the Gazprombank Facility. Robust Iron Ore Pricing to Continue Due to the increase of global iron ore supply, the 65% iron ore Platts benchmark price was relatively volatile during the quarter and decreased from US$136 per ton to stabilize at US$89 per ton. The demand of iron ore from China recovered in September and this supported the price to rebound to about US$100 per ton at the end of the quarter. The spread between 65% Fe and 62% Fe narrowed to about US$6 per ton in September due to the slowdown of the Chinese economy and the relaxation of Chinese government environmental protection policies. During our conversations with the management, they mentioned that the spot price for grade 65% iron ore is expected to remain buoyant as the Chinese government continues to strictly tighten policies for control of pollution levels in the country and due to growing demand for iron ore as a critical element in Chinese infrastructure projects and the massive developments on Belt and Road initiative. These policies would continue to benefit IRC in FY2019 and beyond as the inherent demand for 65% grade iron ore remains high. The focus of the company would thereby remain on increasing the capacity of the plant along with reduction in costs to improve efficiencies which would grow revenues and improve gross margins for the company. Drying Unit Commences Operation for Winter As winter approaches, K&S has commenced the use of the Drying Unit. The Drying Unit is an essential part of the K&S production process as it removes excessive moisture from the iron ore concentrate to prevent the product from freezing in cold weather conditions, allowing all year-round production. Earlier this year, K&S identified and resolved the known technical issues of the Drying Unit. The site team is now ramping up the utilization rate of the Drying Unit and assessing its operating efficiency. Subject to resolving further issues, if any, and making necessary adjustments, the Drying Unit is ready to support 24/7 production of K&S during winter. Hedging To Maintain Healthy Cash Flow The selling price of K&S’s iron ore product is determined with reference to the international Platts spot price of iron ore concentrates. IRC has entered into hedging contracts to implement a partial hedge against adverse changes in the iron ore price. IRC’s strategy is to hedge no more than half of K&S’s production, with the remaining volume left unhedged. The hedging instruments, mostly in the form of protective collars, protect IRC from a significant reduction in the iron ore price. Although IRC may not be able to fully capture the upside of the market price, hedging secures a healthy margin of cashflow for IRC which is important from a risk management perspective, especially in light of the need to service to loan from Gazprombank.


5 Year Price Chart

1 Year Iron Ore Price Chart


Income Statement (US$ million) 1H2018 2H2018 1H2019E 2H2019E 1H2020E 2H2020E 1H2021E 2H2021E

Revenue 70.2 81.4 89.2 101.4 107.1 117.1 124.2 133.6

y/y 27.2% 24.6% 20.0% 15.5% 16.0% 14%

Site operating expenses and service costs -65.2 -75.4 -80.8 -87.7 -79.2 -87.8 -87.0 -96.5

as a % of sales 93.0% 92.7% 90.5% 86.5% 74.0% 75.0% 70.0% 70.0%

General administration expenses -5.2 -5.2 -5.2 -6.0 -6.4 -5.7 -6.2 -7.4

as a % of sales 7.5% 6.4% 5.9% 6.0% 6.0% 4.9% 5.0% 5.6%

Operating Income -0.3 0.8 3.3 7.6 21.4 23.6 31.1 29.7

y/y 991.0% 900.5% 556.6% 209.8% 45.0% 26.0%

Operating margin (%) -0.4% 0.9% 3.7% 7.5% 20.0% 20.1% 25.0% 22.2%

Interest Expense -10.4 -11.3 -24.2 -12.4 -8.0 -8.0 -7.3 -7.3

Interest income 0.0 0.0 0.0 0.2 -0.4 -0.4 -0.3 -0.3

Equity in (losses)income of affiliates 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Other recurring (expenses)/income 2.9 3.9 -5.0 10.0 0.0 0.0 0.0 0.0

Amortization of intangibles 0.0 0.0 0.0 0.0 2.6 2.6 2.7 2.7

Goodwill impairment -7.5 7.5 0.0 0.0 0.0 0.0 0.0 0.0

Other non recurring (expenses) income 0.0 82.7 0.0 0.0 0.0 0.0 0.0 0.0

Pretax Income (reported) -15.3 83.6 -26.0 5.4 15.6 17.7 26.2 24.8

y/y -69.6% -93.5% 160.1% 226.6% 67.9% 39.9%

Pretax Income (adjusted) -7.8 -10.6 -26.0 5.4 13.0 15.1 23.5 22.1

y/y -234.7% -151.4% 150.0% 178.7% 80.7% 46.1%

- Income Tax Expense -0.3 0.2 0.7 0.0 0.0 0.0 -2.1 -1.6

effective tax rate (%) 2.2% 0.2% -2.7% 0.0% 0.0% 0.0% 8.0% 6.3%

- Minority Interests -0.018 -0.012 -0.02 0.3 0.9 0.0 0.0 0.1

Income Before XO Items -15.7 83.8 -25.3 5.7 16.5 17.8 24.1 23.4

y/y -61.4% -93.2% 165.3% 211.4% 45.9% 31.4%

- Extraordinary Loss Net of Tax 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.4

Net Income (reported) -15.7 83.8 -25.3 5.7 16.5 17.8 24.1 23.8

y/y -61.4% -93.2% 165.3% 211.4% 45.9% 33.7%

Exceptional (L)G 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.41

Net Income (adjusted) -9.2 -54.7 -26.7 5.7 13.9 15.2 21.3 20.2

y/y -190.7% -110.4% 152.0% 165.9% 53.7% 33.5%

Basic EPS (reported) -0.0022 0.0118 -0.0036 0.0008 0.0023 0.0025 0.0034 0.0033

Basic EPS (adjusted) -0.0013 -0.0077 -0.0038 0.0008 0.0020 0.0021 0.0030 0.0029

Basic Weighted Avg Shares 7,093.39 7,093.39 7,093.39 7,093.39 7,093.39 7,093.39 7,093.39 7,093.39

Diluted EPS (reported) -0.0022 0.0118 -0.0036 0.0008 0.0023 0.0025 0.0034 0.0033

y/y -61.4% -93.2% 165.3% 211.4% 45.9% 33.7%

Diluted EPS (adjusted) -0.0013 -0.0077 -0.0038 0.0008 0.0020 0.0021 0.0030 0.0029

y/y -190.7% -110.4% 152.0% 165.9% 53.7% 33.5%

Diluted Weighted Avg Shares 7,093.39 7,093.39 7,093.39 7,093.39 7,093.39 7,093.39 7,093.39 7,093.39


Income Statement (US$ million) CY 2012 CY 2013 CY 2014 CY 2015 CY 2016 CY 2017 CY 2018 CY 2019E CY 2020E CY 2021E CY 2022E CAGR(2018-22)

Revenue 139.7 160.9 122.4 81.9 16.5 109.3 151.5 190.6 224.2 257.8 290.0 17.6%

y/y 15.2% -23.9% -33.1% -79.9% 563.5% 38.7% 25.8% 17.6% 15.0% 12.5%

Site operating expenses and service costs -141.9 -156.1 -148.0 -95.9 -24.8 -96.2 -140.7 -168.5 -167.1 -183.5 -200.8

as a % of sales 101.6% 97.1% 120.9% 117.1% 150.6% 88.1% 92.8% 88.4% 74.5% 71.2% 69.2%

General administration expenses -26.2 -19.0 -16.8 -10.2 -10.4 -9.9 -10.4 -11.3 -12.2 -13.6 -15.3

as a % of sales 18.8% 11.8% 13.7% 12.4% 63.1% 9.0% 6.9% 5.9% 5.4% 5.3% 5.3%

Operating Income -28.4 -14.3 -42.3 -24.1 -18.7 3.2 0.5 10.9 45.0 60.7 73.9 255.9%

y/y -49.6% 195.5% -43.0% -22.5% -116.9% -85.5% 2257.0% 313.9% 35.1% 21.7%

Operating margin (%) -20.4% -8.9% -34.6% -29.5% -113.7% 2.9% 0.3% 5.7% 20.1% 23.6% 25.5%

Interest Expense -2.2 -3.3 -2.5 -1.9 -1.2 -22.4 -21.7 -36.6 -16.1 -14.5 -13.0

Interest income 0.4 1.0 1.7 1.5 0.4 0.1 0.0 0.2 -0.8 -0.7 0.0

interest rate 6% 2% 3% 1% 0% 3% 3% 3% 3% 3%

Equity in (losses)income of affiliates -2.5 -0.1 2.9 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Other recurring (expenses)/income 2.6 -1.5 -10.2 -4.4 0.7 2.1 6.8 5.0 5.2 5.4 5.6

Amortization of intangibles 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Goodwill impairment 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Other non recurring (expenses) income -27.1 -28.9 -260.8 -480.1 0.0 129.6 82.7 0.0 0.0 0.0 0.0

Pretax Income (reported) -57.2 -47.0 -311.3 -509.0 -18.8 112.6 68.3 -20.5 33.3 51.0 66.6

y/y -17.8% 561.8% 63.5% -96.3% -699.0% -39.3% -130.0% -262.3% 53.0% 30.7%

Pretax Income (adjusted) -30.1 -18.2 -50.5 -28.9 -18.8 -17.0 -14.4 -20.5 33.3 50.9 66.6

y/y -39.7% 177.8% -42.7% -35.2% -9.5% -15.1% 42.3% -262.2% 53.1% 30.7%

- Income Tax Expense -0.2 -0.7 -6.0 -0.2 -0.3 0.6 -0.1 0.0 0.0 -4.1 -8.0

effective tax rate (%) -0.3% -1.4% -1.9% 0.0% -1.7% -0.5% 0.0% 0.0% 0.0% 8.0% 12.0%

- Minority Interests -0.189 6.162 -0.314 0.3 0.9 0.0 0.0 0.0 0.0 0.0 0.0

Income Before XO Items -57.6 -41.5 -317.6 -508.9 -18.2 113.3 68.2 -20.5 33.3 46.9 58.6

y/y -27.8% 664.5% 60.2% -96.4% -721.7% -39.8% -130.1% -262.3% 40.8% 25.0%

- Extraordinary Loss Net of Tax 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Net Income (reported) -57.6 -41.5 -317.6 -508.9 -18.2 113.3 68.2 -20.5 33.3 46.9 58.6

y/y -27.8% 664.5% 60.2% -96.4% -721.7% -39.8% -130.1% -262.3% 40.8% 25.0%

Exceptional (L)G 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Net Income (adjusted) -31.6 -57.0 -58.3 -28.9 -18.2 -16.4 -14.6 -20.5 33.3 46.9 58.6

y/y 80.5% 2.2% -50.4% -37.1% -10.0% -10.8% 40.7% -262.2% 40.8% 25.1%

Basic EPS (reported) -0.0174 -0.0104 -0.0659 -0.0948 -0.0030 0.0160 0.0096 -0.0029 0.0047 0.0066 0.0083

Basic EPS (adjusted) -0.0096 -0.0143 -0.0121 -0.0054 -0.0029 -0.0023 -0.0021 -0.0029 0.0047 0.0066 0.0083

Basic Weighted Avg Shares 3,305.82 3,996.45 4,821.74 5,366.26 6,175.32 7,093.39 7,093.39 7,093.39 7,093.39 7,093.39 7,093.39

Diluted EPS (reported) -0.0174 -0.0104 -0.0659 -0.0948 -0.0030 0.0160 0.0096 -0.0029 0.0047 0.0066 0.0083 -

y/y -40.3% 533.6% 44.0% -96.9% -641.2% -39.8% -130.1% -262.3% 40.8% 25.0%

Diluted EPS (adjusted) -0.0096 -0.0143 -0.0121 -0.0054 -0.0029 -0.0023 -0.0021 -0.0029 0.0047 0.0066 0.0083 -

y/y 49.3% -15.3% -55.4% -45.4% -21.7% -10.8% 40.7% -262.2% 40.8% 25.1%

Diluted Weighted Avg Shares 3,305.82 3,996.45 4,821.74 5,366.26 6,175.32 7,093.39 7,093.39 7,093.39 7,093.39 7,093.39 7,093.39


Reference Items CY 2012 CY 2013 CY 2014 CY 2015 CY 2016 CY 2017 CY 2018 CY 2019E CY 2020E CY 2021E CY 2022E

EBITDA -8.7 6.8 -35.8 -23.5 -10.7 17.8 21.7 31.5 68.1 86.0 100.9

Dividends per Share 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Dividend payout ratio 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Dep & Amor. 19.8 21.1 6.5 0.7 8.0 14.6 21.2 20.7 23.1 25.2 26.9

as a % of sales 14.2% 13.1% 5.3% 0.8% 48.6% 13.4% 12.0% 10.8% 10.3% 9.8% 9.3%

Balance Sheet (US$ million) CY 2012 CY 2013 CY 2014 CY 2015 CY 2016 CY 2017 CY 2018 CY 2019E CY 2020E CY 2021E CY 2022E

Assets

+ Cash & Near Cash Items 15.5 89.6 45.0 49.2 31.3 8.7 7.6 -26.9 -22.0 1.4 32.9

+ Short-Term Investments 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

+ Accounts & Notes Receivable 54.5 46.5 26.0 25.5 23.8 25.4 11.0 18.8 22.1 25.4 28.6

+ Inventories 43.0 55.2 49.2 29.6 20.4 28.6 23.2 26.1 30.7 35.3 39.7

+ Other Current Assets 2.5 2.7 2.7 7.0 0.0 0.3 0.0 0.0 0.0 0.0 0.0

Total Current Assets 115.5 194.2 122.9 111.2 75.5 63.0 41.8 18.0 30.9 62.2 101.2

+ Long-Term Investments 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

+ Gross Fixed Assets 1,153.9 1,209.0 1256.451 1,293.5 1,433.6 1,439.6 1,535.1 1,542.7 1,576.4 1,607.3 1,643.6

- Accumulated Depreciation -559.5 -596.0 -793.6 -1,093.8 -1,099.9 -980.5 -1,001.7 -1,022.3 -1,045.4 -1,070.6 -1,097.6

+ Net Fixed Assets 594.4 613.1 462.9 199.7 333.7 459.1 533.4 520.4 531.0 536.7 546.0

+Exploration and Evaluation Assets 65.4 53.3 54.8 18.6 18.9 19.1 19.5 19.5 19.5 19.5 19.5

+ Other Long-Term Assets 182.4 235.2 233.7 91.1 4.8 5.0 15.2 15.2 15.2 15.2 15.2

+ Goodwill & other Intangible Assets 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total Long-Term Assets 842.2 901.5 751.3 309.5 357.3 483.3 568.1 555.1 565.6 571.4 580.7

Total Assets 957.7 1,095.7 874.2 420.6 432.8 546.3 610.0 573.1 596.5 633.5 681.9

Liabilities & Shareholders' Equity

+ Accounts Payable 23.9 22.0 14.8 18.0 21.5 33.6 54.8 57.5 67.6 77.7 87.4

+ Short-Term Borrowings 15.0 41.3 63.5 53.1 65.7 61.0 112.0 112.0 112.0 112.0 112.0

+ Other Short-Term Liabilities 10.6 0.3 0.5 0.4 0.3 4.5 0.3 0.3 0.3 0.3 0.3

Total Current Liabilities 49.5 63.6 78.8 71.4 87.6 99.0 167.0 169.7 179.8 189.9 199.7

+ Long-Term Borrowings 108.5 158.7 205.1 215.2 177.2 162.1 100.9 80.9 60.9 40.9 20.9

+Provision for Close Down and Restoration Costs 14.6 8.6 4.0 6.4 10.1 14.0 10.0 10.0 10.0 10.0 10.0

+Construction Costs Payable 0.0 0.0 0.0 0.0 17.8 16.1 8.9 8.9 8.9 8.9 8.9

+ Other Long-Term Liabilities 1.9 2.0 6.5 6.3 6.5 3.6 3.6 3.6 3.6 3.6 3.6

Total Liabilities 174.5 232.8 294.3 299.5 299.2 294.8 290.5 273.1 263.2 253.4 243.1

+ Total Preferred Equity 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

+ Share Capital & APIC 1,046.5 1,171.8 1,211.2 1,260.7 1,285.2 1,285.2 1,285.2 1,285.2 1,285.2 1,285.2 1,285.2

+ Retained Earnings & Other Equity -274.9 -314.1 -634.2 -1,141.0 -1,151.5 -1,033.7 -965.4 -985.9 -952.6 -905.7 -847.0

Total Shareholders' Equity 771.6 857.8 577.0 119.7 133.7 251.5 319.8 299.3 332.6 379.5 438.1

+ Minority Interest 11.6 5.1 2.9 1.5 -0.1 0.0 -0.3 0.7 0.7 0.7 0.7

Total Liabilities & Equity 957.7 1,095.7 874.2 420.6 432.8 546.3 610.0 573.1 596.5 633.5 681.9


Cash Flow (US$ million) CY 2012 CY 2013 CY 2014 CY 2015 CY 2016 CY 2017 CY 2018 CY 2019E CY 2020E CY 2021E CY 2022E

+ Profit before tax-Cash Tax Paid -57.8 -47.6 -311.9 -509.4 -19.1 112.5 -14.6 -20.5 33.3 46.9 58.6

+ Depreciation & Amortization 19.8 21.1 6.5 0.7 8.0 14.6 21.2 20.7 23.1 25.2 26.9

+ Other Non-Cash Adjustments 33.0 28.3 264.4 479.3 -1.6 -105.5 0.0 0.0 0.0 0.0 0.0

+ Changes in Working Capital 4.1 -10.2 5.0 15.0 13.4 -0.1 22.3 -8.1 2.2 2.2 2.1

Cash From Operating Activities -0.9 -8.4 -36.0 -14.4 0.7 21.6 16.0 -7.9 58.6 74.3 87.7

+ Disposal of Fixed Assets 5.706 0.5 0.5 0.1 1.7 0.0 0.0 0.0 0.0 0.0 0.0

+ Capital Expenditures -142.6 -113.6 -101.0 -52.6 -14.7 -6.8 -3.4 -7.6 -33.6 -30.9 -36.3

+ Increase in Investments -2.5 -0.24 -21.2 -4.3 -29.1 -0.3 0.0 0.0 0.0 0.0 0.0

+ Decrease in Investments 0.0 25.1 36.2 0.0 0.0 0.0 0.0 0.0 0.0

+ Other Investing Activities 1.332 0.988 4.8 2.4 4.9 0.1 -5.4 0.0 0.0 0.0 0.0

Cash From Investing Activities -138.1 -112.4 -116.9 -29.2 -1.0 -7.0 -8.8 -7.6 -33.6 -30.9 -36.3

+ Dividends Paid 0.0 0.0 -0.3 -0.5 -1.0 0.0 0.0 0.0 0.0 0.0 0.0

+ Change in Short-Term Borrowings 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

+ Increase in Long-Term Borrowing 151.2 131.8 154.0 64.9 30.6 27.4 0.0 0.0 0.0 0.0 0.0

+ Decrease in Long-term Borrowing -38.8 -51.5 -81.1 -65.8 -60.4 -49.2 -9.5 -20.0 -20.0 -20.0 -20.0

+ Increase in Capital Stocks 0.0 126.9 38.9 49.4 25.3 0.0 0.0 0.0 0.0 0.0 0.0

+ Decrease in Capital Stocks 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

+ Other Financing Activities 10.0 -10.0 0.0 0.0 -10.2 -14.2 0.0 0.0 0.0 0.0 0.0

+Loan Guarantee Fee Paid -1.5 -1.0 -0.5 -0.1 -1.1 -1.1 0.0 0.0 0.0 0.0 0.0

Cash from Financing Activities 121.0 196.2 111.0 47.9 -16.8 -37.2 -9.5 -20.0 -20.0 -20.0 -20.0

Effect of Exchange Rate Changes 0.3 -1.2 -2.6 -0.1 -0.8 -0.1 0.0 0.0 0.0 0.0 0.0

Net Changes in Cash -17.7 74.2 -44.6 4.2 -17.8 -22.7 -2.4 -35.6 5.0 23.4 31.5

Opening cash 11.0 8.6 -26.9 -22.0 1.4

Closing cash 8.6 -26.9 -22.0 1.4 32.9


Ratio Analysis CY 2012 CY 2013 CY 2014 CY 2015 CY 2016 CY 2017 CY 2018 CY 2019E CY 2020E CY 2021E CY 2022E Growth Ratios % Revenue 15.2% -23.9% -33.1% -79.9% 563.5% 38.7% 25.8% 17.6% 15.0% 12.5% EBITDA -178.2% -627.9% -34.5% -54.3% -266.0% 21.8% 45.5% 115.9% 26.3% 17.4% Operating Income -49.6% 195.5% -43.0% -22.5% -116.9% -85.5% 2257.0% 313.9% 35.1% 21.7% Net income reported -27.8% 664.5% 60.2% -96.4% -721.7% -39.8% -130.1% -262.3% 40.8% 25.0% Net income adjusted 80.5% 2.2% -50.4% -37.1% -10.0% -10.8% 40.7% -262.2% 40.8% 25.1% Diluted EPS reported -40.3% 533.6% 44.0% -96.9% -641.2% -39.8% -130.1% -262.3% 40.8% 25.0% Diluted EPS adjusted 49% -15% -55% -45% -22% -11% 41% -262% 41% 25% Dividend per share 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Accounts Receivables -14.6% -44.2% -2.0% -6.5% 6.7% -56.6% 70.5% 17.6% 15.0% 12.5% Inventory 28.5% -11.0% -39.9% -31.1% 40.5% -19.0% 12.7% 17.6% 15.0% 12.5% Fixed Assets 3.1% -24.5% -56.9% 67.1% 37.6% 16.2% -2.4% 2.0% 1.1% 1.7% Total Assets 14.4% -20.2% -51.9% 2.9% 26.2% 11.7% -6.0% 4.1% 6.2% 7.6% Working Capital 25.6% -23.9% -30.3% -48.7% -27.2% -228.2% -38.6% 17.2% 14.7% 12.3% Accounts Payable -7.8% -32.9% 21.8% 19.1% 56.5% 63.1% 4.9% 17.6% 15.0% 12.5% Short Term Debt 175.0% 53.9% -16.5% 23.9% -7.3% 83.7% 0.0% 0.0% 0.0% 0.0% Long Term Debt 46.3% 29.2% 5.0% -17.7% -8.6% -37.7% -19.8% -24.7% -32.8% -48.9% Total Equity 11.2% -32.7% -79.3% 11.7% 88.1% 27.2% -6.4% 11.1% 14.1% 15.5%

Cash From Operations 858.0% 328.5% -60.0% -105.2% 2789.6% -26.0% -149.6% -839.4% 26.8% 18.0% Capital Expenditure -20.3% -11.1% -47.9% -72.0% -54.0% -50.3% 126.0% 341.1% -8.0% 17.2% Free Cash Flow -15.0% 12.3% -51.1% -79.1% -205.7% -14.8% -223.5% -260.6% 73.7% 18.6%

Per Share Data (US$) CY 2012 CY 2013 CY 2014 CY 2015 CY 2016 CY 2017 CY 2018 CY 2019E CY 2020E CY 2021E CY 2022E Basic EPS (adjusted) -0.0096 -0.0143 -0.0121 -0.0054 -0.0029 -0.0023 -0.0021 -0.0029 0.0047 0.0066 0.0083 Diluted EPS (adjusted) -0.0096 -0.0143 -0.0121 -0.0054 -0.0029 -0.0023 -0.0021 -0.0029 0.0047 0.0066 0.0083 Dividend per share (DPS) 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 Book Value per share (BVPS) 0.2334 0.2146 0.1197 0.0223 0.0216 0.0355 0.0451 0.0422 0.0469 0.0535 0.0618

Margins (%) Operating Margin -20.4% -8.9% -34.6% -29.5% -113.7% 2.9% 0.3% 5.7% 20.1% 23.6% 25.5% EBITDA Margin -6.2% 4.2% -29.3% -28.6% -65.1% 16.3% 14.3% 16.5% 30.4% 33.3% 34.8% Pre-Tax Margin (adjusted) -21.6% -11.3% -41.2% -35.3% -114.0% -15.5% -9.5% -10.8% 14.8% 19.8% 23.0% Net Income Margin (adjusted) -22.6% -35.4% -47.6% -35.3% -110.4% -15.0% -9.6% -10.8% 14.8% 18.2% 20.2%

Return Ratios Dupont ROE (%) -4.1% -6.6% -10.1% -24.2% -13.6% -6.5% -4.6% -6.9% 10.0% 12.4% 13.4% Margin (%) -22.6% -35.4% -47.6% -35.3% -110.4% -15.0% -9.6% -10.8% 14.8% 18.2% 20.2% Turnover (x) 0.1 0.1 0.1 0.2 0.0 0.2 0.2 0.3 0.4 0.4 0.4 Leverage (x) 1.2 1.3 1.5 3.5 3.2 2.2 1.9 1.9 1.8 1.7 1.6

Return on Assets -3.3% -5.2% -6.7% -6.9% -4.2% -3.0% -2.4% -3.6% 5.6% 7.4% 8.6% Return on Capital Employed -3.1% -1.4% -5.3% -6.9% -5.4% 0.7% 0.1% 2.7% 10.8% 13.7% 15.3% Return on Invested Capital -3.5% -5.4% -6.9% -7.5% -4.8% -3.4% -2.7% -4.2% 6.6% 8.8% 10.3%

FCF Calculation Op. cash (US$) -0.9 -8.4 -36.0 -14.4 0.7 21.6 16.0 -7.9 58.6 74.3 87.7 capex -142.6 -113.6 -101.0 -52.6 -14.7 -6.8 -3.4 -7.6 -33.6 -30.9 -36.3 FCF (US$ million) -143.5 -122.0 -137.0 -67.0 -14.0 14.8 12.6 -15.6 25.0 43.4 51.5 FCF margin (%) -102.7% -75.9% -111.9% -81.8% -84.9% 13.5% 8.3% -8.2% 11.1% 16.8% 17.7% FCF per share -0.0434 -0.0305 -0.0284 -0.0125 -0.0023 0.0021 0.0018 -0.0022 0.0035 0.0061 0.0073 Price/FCF per share -0.50 -0.71 -0.76 -1.73 -9.56 10.39 12.20 -9.88 6.15 3.54 2.99 FCF Yield -200.4% -141.0% -131.2% -57.7% -10.5% 9.6% 8.2% -10.1% 16.3% 28.2% 33.5%

Net Cash calculation Cash + short term investments 15.5 89.6 45.0 49.2 31.3 8.7 7.6 -26.9 -22.0 1.4 32.9 Less: long term debt + ST debt -123.5 -199.9 -268.6 -268.3 -243.0 -223.0 -212.9 -192.9 -172.9 -152.9 -132.9 Net Cash -108.0 -110.3 -223.5 -219.1 -211.6 -214.4 -205.2 -219.8 -194.8 -151.4 -100.0


Valuation ratio's CY 2012 CY 2013 CY 2014 CY 2015 CY 2016 CY 2017 CY 2018 CY 2019E CY 2020E CY 2021E CY 2022E

P/B 0.66 0.44 0.56 1.10 1.97 0.93 0.48 0.51 0.46 0.40 0.35

P/E -16.20 -6.69 -5.55 -4.55 -14.46 -14.36 -10.53 -7.48 4.62 3.28 2.62

P/S 3.66 2.37 2.64 1.61 15.96 2.15 1.01 0.81 0.69 0.60 0.53

EV/sales 4.52 3.92 5.16 7.71 38.34 5.78 4.17 3.31 2.82 2.45 2.18

EV/EBITDA -72.76 73.22 -15.35 -15.01 -44.28 25.25 16.55 11.37 5.27 4.17 3.55

EV/EBIT -22.19 -44.06 -14.91 -26.15 -33.71 198.96 1369.43 58.10 14.04 10.39 8.54

EV/FCF -4.40 -5.17 -4.61 -9.42 -45.13 42.70 50.13 -40.59 25.28 14.55 12.27

Dividend Yield (%) 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Div payout on FCF 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Working Capital Ratios CY 2012 CY 2013 CY 2014 CY 2015 CY 2016 CY 2017 CY 2018 CY 2019E CY 2020E CY 2021E CY 2022E

Receivable days (DSO) 115 108 115 546 82 44 36 36 36 36

Inventory days (DIO) 111 156 175 554 82 62 50 50 50 50

Payables days (DPO) 52 55 73 438 92 106 110 110 110 110

Current ratio 2.3 3.1 1.6 1.6 0.9 0.6 0.3 0.1 0.2 0.3 0.5

Quick ratio 1.5 2.2 0.9 1.1 0.6 0.3 0.1 0.0 0.0 0.1 0.3

Working capital 65 82 63 44 22 16 -21 -13 -15 -17 -19

Cash conversion cycle 174 209 217 662 72 0 -24 -24 -24 -24

Leverage Ratios

Debt / equity 16% 23% 47% 224% 182% 89% 67% 64% 52% 40% 30%

Net cash (debt) / equity -14% -13% -39% -183% -158% -85% -64% -73% -59% -40% -23%

Net cash (debt) / mkt cap -21% -29% -69% -167% -81% -91% -134% -143% -127% -99% -65%

Net cash (debt) / capital -12% -10% -26% -56% -56% -45% -39% -45% -39% -28% -18%

Coverage Ratios

Interest coverage [EBIT] -15.8 -6.1 -48.3 -58.3 -24.1 0.1 0.0 0.3 2.7 4.0 5.7

Interest coverage [Opt. CF] -0.5 -3.6 -41.1 -34.8 1.0 1.0 0.7 -0.2 3.5 4.9 6.8

Earnings Quality Ratios

Net operating assets/liab [NOA] 891 973 803 340 345 466 525 520 528 532 539

Average NOA 932 888 572 343 406 495 522 524 530 535

B/S accrual ratio 0.09 -0.19 -0.81 0.01 0.30 0.12 -0.01 0.02 0.01 0.01

CF accurual ratio -0.02 -0.02 -0.01 -0.03 -0.07 0.01 0.04 0.02 -0.05 -0.05

Enterprise Value Calculation CY 2012 CY 2013 CY 2014 CY 2015 CY 2016 CY 2017 Current

Market Cap. 512 382 323 132 263 235 154

+ Minority Interest 12 5 3 1 0 0 0

+Total Debt (ST & LT Debt) 123 200 269 268 243 223 213

- Cash & Equivalents 16 90 45 49 31 9 8

Enterprise Value 631 497 550 352 474 449 359


DCF model 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E

(in US$ million)

EBIT -28 -14 -42 -24 -19 3 0 11 45 61 74 83 91 97 102 106

% growth 0% -50% 195% -43% -22% -117% -85% 2257% 314% 35% 22% 12% 10% 6% 5% 4%

Taxes @ -0.3% -1.4% -1.9% 0.0% -1.7% -0.5% 0.0% 0.0% 0.0% 8.0% 12.0% 14.0% 18.0% 18.0% 18.0% 18.0%

EBIAT -29 -15 -43 -24 -19 3 0 11 45 56 65 71 75 80 84 87

% growth 0% -49% 197% -44% -21% -117% -86% 2257% 314% 24% 16% 10% 5% 6% 5% 4%

+ D&A 20 21 7 1 8 15 21 21 23 25 27 29 31 32 33 34

- Capital expenditures -143 -114 -101 -53 -15 -7 -3 -8 -34 -31 -36 -38 -40 -41 -41 -41

- Change in net WC 4 -10 5 15 13 0 22 -8 2 2 2 2 2 1 1 1

Free Cash Flow to Firm -147 -117 -133 -61 -12 11 41 16 37 52 58 64 68 73 77 81

FCY y/y growth -20% 13% -54% -80% -189% 270% -61% 131% 43% 11% 11% 6% 7% 6% 6%

Value per Share

Cost of capital WACC 11.4%

Terminal Growth 9.4% 10.4% 11.4% 12.4% 13.4% PV of Free Cash Flow 296

2.5% 0.67 0.54 0.44 0.36 0.30 PV of Terminal Value 340

2.8% 0.70 0.56 0.46 0.37 0.31 Add: Net Cash -214

3.0% 0.72 0.57 0.46 0.38 0.31 Less: Non-Controlling Interest -1

3.3% 0.75 0.59 0.48 0.39 0.32 Total Equity Value 421

3.5% 0.77 0.61 0.49 0.40 0.33 Shares outstanding 7,093.39

DCF value 0.46

All Values are in mn US$ except stock price which is in HK$


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