Morgan Stanley: The Undervalued "Golden Trio" of China

On the 11th, Morgan Stanley's Sara Chan team released a research report titled "China Gold: From Alpha to Beta," optimistic about the future development prospects of China Gold, believing that the Chinese gold market will benefit from various favorable factors globally and domestically.

Morgan Stanley pointed out that against the backdrop of increasing geopolitical risks, China Gold will benefit from market risk aversion sentiment and be favored by Chinese investors. The expected fluctuations in the renminbi also provide support for rising gold prices.

The report specifically highlighted China's gold "three giants" — Zijin Mining, SD GOLD, and ZHAOJIN MINING, believing they are undervalued in the market and are expected to see significant production growth over the next five years.

Morgan Stanley's commodities team predicts that gold prices have moderate upside potential in the short term, expecting to reach USD 2,850 per ounce by the second quarter of 2025, which is 5% higher than the current near-historical highs.

Zijin, SD GOLD, ZHAOJIN: Significant Production Growth Expected in the Next Five Years

The report emphasized three major advantages of Chinese gold mining companies: First, in the context of global geopolitical uncertainty and a rate-cutting cycle, gold as the preferred commodity brings opportunities for Chinese gold mining companies; second, the strong investment demand for gold from Chinese investors; third, under the expectation of renminbi fluctuations, gold prices are likely to rise further.

Morgan Stanley predicts that gold prices have moderate upside potential in the short term, expecting to reach USD 2,850 per ounce by the second quarter of 2025, which is 5% higher than the current near-historical highs.

The report mentioned that Zijin Mining, SD GOLD, and ZHAOJIN MINING are expected to achieve significant production growth over the next five years, with compound annual growth rates of 20.8%, 12.4%, and 8.2%, respectively. In particular, Zijin Mining's marine project is expected to start operations by the end of 2025, significantly increasing the company's gold production from 17.7 tons in 2023 to 35.2 tons.

“We expect that as gold prices rise, the profits of Chinese gold mining companies will increase significantly. For example, for ZHAOJIN, SD GOLD, and Zijin, a 1% increase in gold prices is expected to boost their net profits by 0.7% to 2.8%.”

Although gold jewelry consumption declined in the first half of this year, investor enthusiasm remains high. Morgan Stanley data shows that gold purchases in the first half of the year increased by 46% year-on-year, mainly due to strong growth in investment demand. Morgan Stanley expects that this year, investment demand will account for more than 40% of total gold consumption, far exceeding last year's level.

Why Choose China Gold

Morgan Stanley stated that compared to other gold companies, Chinese gold companies hold more prominent alpha opportunities. This is mainly attributed to three points: First, there is strong domestic market demand. Morgan Stanley stated that Chinese investors' enthusiasm for gold continues to rise, providing a stable market foundation for domestic gold companies.

Unlike the cooling demand for global gold ETFs, the demand for onshore gold ETFs in China continues to heat up. In the first half of 2024, demand for gold bars surged, accounting for half of China's total gold demand. Additionally, the People's Bank of China’s gold purchases have also supported market demand.

Second, Chinese gold miners are leading in production growth. Morgan Stanley noted that over the past decade, Chinese gold miners have become increasingly active in the M&A market. This is mainly due to China's strong demand for securing gold reserves. The "three giants" of Chinese gold are actively seeking new mining projects overseas, especially in Africa.

Finally, the profitability elasticity of Chinese gold is greater. Morgan Stanley predicts that with expectations of fluctuations in the renminbi, the price of gold denominated in renminbi will rise by 14% year-on-year by 2025, reaching a historical high of 652 yuan per gram.

The report also pointed out that the market may overlook the growth potential of Chinese gold mining companies. Over the past year, Chinese gold stocks have risen by 7-28%, lagging behind the 8-49% increase of global gold peers. Morgan Stanley believes that global geopolitical tensions and the record-high gold price environment have also raised concerns about the overseas project execution capabilities of Chinese mining companies.

Nevertheless, Morgan Stanley also reminds investors to be aware of potential risk factors, including delays in interest rate cuts, failure to achieve capital flows, and a shift in market sentiment towards risk appetite, which could lead to profit takebacks