China Gold - Adding Alpha to Beta

Summary of the Conference Call on Chinese Gold Industry Industry Overview - The conference call focused on the Chinese gold mining industry, particularly highlighting companies such as Zhaojin, Zijin, and Shandong Gold [8][46][47]. Key Insights 1. Positive Outlook on Gold Prices: Morgan Stanley maintains a constructive view on gold prices, forecasting a modest near-term upside with a target of US$2,850/oz for 2Q25, which is 5% higher than current levels [8][46]. 2. Investment Opportunities: The report emphasizes alpha opportunities among Chinese gold miners, driven by: - Above-peer volume growth. - Easing policies in China providing cheap funding for growth. - Strong appetite from Chinese investors [8][46][50]. 3. Production Growth Forecast: - Zhaojin, Shandong Gold, and Zijin are projected to achieve gold production CAGRs of 20.8%, 12.4%, and 8.2% respectively from 2023 to 2028 [8][46][49]. - Zhaojin's Haiyu project is expected to commence by the end of 2025, significantly boosting its output [8][46]. 4. Currency Impact: A weaker Chinese Yuan (CNY) is expected to benefit gold miners, with forecasts suggesting a depreciation to 7.6 by the end of 2025 [8][46]. 5. Market Performance: Chinese gold stocks have underperformed compared to global peers, with a 7-28% increase over the past year, lagging behind global gold stocks which rose 8-49% [8][46][50]. Financial Metrics - Gold Price Sensitivity: For every 1% increase in gold prices, net profits for Zhaojin, Shandong Gold, and Zijin are expected to rise by 0.7-2.8% [8][47]. - Investment Demand Growth: Investment demand for gold in China surged by 46% YoY in 1H24, while jewelry demand fell by 27% YoY [50][61]. Strategic Recommendations - Preferred Stocks: Morgan Stanley recommends Shandong Gold (H) and Zhaojin as preferred picks in the Chinese gold sector, with respective price targets indicating significant upside potential [8][46][37]. - M&A Activity: The report notes that Chinese gold producers have been active in mergers and acquisitions, which is expected to enhance their growth profiles [8][46][49]. Risks and Considerations - Execution Risks: Concerns regarding the execution of overseas projects by Chinese miners amid geopolitical tensions and high gold prices were highlighted [8][46]. - Market Sentiment: Potential delays in rate cuts and shifts in market sentiment could lead to profit-taking in the sector [8][46]. Conclusion The Chinese gold mining industry presents significant investment opportunities driven by favorable market conditions, strong production growth, and a robust investment appetite from domestic investors. However, investors should remain cautious of execution risks and market volatility.