CGN MINING(1164.HK)：1H HIT BY ONE-OFF TAX EXPENSES AND LOW OFFTAKE;KAP OUTPUT CUT OFFERS REENTRY OPPORTUNITY-格隆汇

机构：中银国际
研究员：Tony FEI/Freya REN

CGNM’s 1H24 earnings of HK$113m was in line with previous profit alert, as provisions on withholding tax expenses and lower-than- expected offtake volume hit the profits. On Friday evening, KAP updated its 2025 production target of 25,000-26,500tU, a 5,000tU cut from previous target of restoring to 100% capacity. We believe as investors turn the page of tax expenses and looking ahead on strong uranium fundamentals, CGNM appears appealing again after recent correction. We maintain BUY rating and HK$2.10 TP for CGNM. The stock is trading at 12x/8x 25/26E P/E, and remains a good proxy to play on nuclear growth story, in our view.
Key Factors for Rating
1H24 results review. CGNM booked income tax expenses of HK$211m in 1H24, +278% YoY, which is the major reason for the unexpected profit decline. Of which, HK$164m are for Kazakhstan withholding tax (WHT) as the management made provisions for both the current and previous periods due to the rising risks of tax practice change. CGNM used to enjoy 5% WHT for its Ortalyk associate for the past few years, but the management now assumes that a 15% WHT rate could be applied due to changing circumstances.
We see the tax rate reassessment as prudent, if not too much so. Kazakshstan may amend its tax code again later this year. According to the latest version for consultation, the 10% WHT bracket currently applied to CGNM’s Semizbay-U JV maybe eliminated, with the addition of a 5% bracket if the non-resident investor holds over 25% stake in the resident company. CGNM owns 49% share in both JV/associate companies, thus it is not impossible that the tax burden may alleviate as Kazakhstan woos foreign investment.
KAP output cut. Last Friday evening, KAP (KAP LI, NR) announced its interim results and updated the much-waited 2025 production guidance. The 25,000- 26,500tU target implies roughly 12% growth compared to 2024’s planned output, but falls short of its initial intentions of 30,500-31,500tU, according to the company. The elimination of 5,000tU supply in the near future would have a big swing on S/D balance, as uranium ETFs jumped 6.9-10.6% during US trading hours on the news. We expect spot uranium prices to react positively in the following weeks, which was up by c.US1.1/lb immediately after the news.
Longer-term prospect in 2026. We seldom look at forward multiples beyond the current year. But for CGNM, whose connected transaction contract with parentco is set to be renewed for 2026-28 period in 2H25, the review of 2026 P/E is advisable, if not necessary, in our view. If the base price is lifted from the c.US$64/lb in 2024 to US$80-90/lb for 2026-28, the company’s realised ASP and profitability would see significant upside, in our view.
Key Risks for Rating
Faster-than-expected production ramp up globally
Unexpected operation disruption in JV/asso
Higher-than-expected production costs
Lower-than-expected profitability from trading business
Valuation
Maintain BUY rating. We cut CGNM’s 2024-26 EPS by 11-53% on higher tax expenses and lower trading profits assumptions. However, after recent correction, the stock is trading at attractive 12x/8x 2025-26 P/E.