Three years, 11 times! This is an inconspicuous golden bull stock.

Since the beginning of this year, with the end of the Fed's rate hike cycle and the acceleration of the global de-dollarization process, the international gold price has risen from 1800 yuan to 2048 yuan, and is close to reaching a historic high. Although the rate hike cycle has not yet ended, the market generally expects the international gold price to reach a new high this year.

Along with the rise in the international gold price, many gold stocks have performed well. Interestingly, we have found a central enterprise gold stock in the Hong Kong stock market - China Gold International (hereinafter referred to as "China Gold International"), which has risen 11 times in just three years, and its valuation is also lower than that of A-share gold stocks.

So, how did a central enterprise stock achieve such a spectacular 11-fold increase?

Unique strategy of central enterprise gold stocks?

First of all, as we mentioned before, the current macro environment gives gold a unique historical opportunity. Under the changes in monetary policy and macro environment, the profit side of gold enterprises will be boosted.

For example, China's push for de-dollarization, global central banks' large-scale purchases of gold, China's promotion of reconciliation between the most powerful shahs in the Middle East, and the balance of oil-producing countries and the United States, these are macro phenomena that have never occurred since the collapse of the Bretton Woods system, which means that the influence of the United States is declining.

The current transitional period has similarities with the Bretton Woods system, and the geopolitical tensions are intensifying, and the trend of countries trying to get rid of the dominance of the US dollar is becoming more and more obvious. The global central banks' accumulation of gold to reduce US dollar reserves means that the United States has spent a century trying to dispel the shadow of gold in human hearts, but now it is facing the backlash of the Fed's monetary policy abuse, and the bell of Bretton Woods 3.0 has already sounded.

Under the stable macro trend, the value of gold stocks is highlighted. So, in the case of a determined trend, how to choose more confident or more stable gold stocks?

China Gold International has achieved a ten-fold increase in the past three years, which is closely related to its parent company, China Gold.

As we all know, central enterprises are usually considered representatives of stable development, with lower elasticity than other private enterprises, but central enterprise gold stocks have characteristics that other gold stocks do not have. And this characteristic is also the most direct way for gold enterprises to achieve high growth.

When resource stocks develop to a certain extent, they need to expand the quality of resources through mergers and acquisitions to change their profitability. That is to say, mergers and acquisitions are the most direct factor for resource stocks to achieve high growth. However, acquiring high-quality assets through mergers and acquisitions will of course require a premium, which may be good for the company in the medium and long term.

Acquisitions during the counter-cyclical period may bring greater pressure in the short term. However, if the parent company injects mining assets into the company, it is equivalent to enhancing the company's profitability factor without paying for the acquisition.

Currently, China Gold International and China Gold are benefiting from this logic. Under the active promotion of state-owned enterprise reform in the past two years, the parent company, China Gold Group, has injected high-quality mining resources into China Gold International and China Gold, replacing mines with poor development prospects in the enterprise to improve the company's profitability factor. 中金国际 will inject four high-quality gold mines overseas into its parent company, which will increase its mineral production by nearly 10 tons. The company is expected to produce 7.5 tons of gold in 2023.

However, copper revenue accounts for 70% of China International Capital Corporation's revenue. After the injection, the market expects that gold revenue will exceed copper revenue, which is one of the key points. Because when the economy is in a downturn, the price of gold may rise, but when the proportion of copper revenue in the enterprise is too high, copper performs poorly in an economic downturn, which will directly affect the company's profits.

Therefore, under the expectation of the major shareholder's injection and the sharp rise in gold prices, China International Capital Corporation has seen an amazing increase in recent times. The A-share China International Gold has also doubled in the past year, benefiting from the expectation of asset injection by its parent company and the recent rise in gold prices.

Of course, it is always an expectation before the resource injection. Another advantage of China International Capital Corporation is the stability of the management of central enterprises and the undervaluation of Hong Kong gold stocks.

Looking back at the development of China International Capital Corporation in the past few years, it is a story of a low-valuation central enterprise stock turning over. From November 2016 to June 2020, China International Capital Corporation once fell nearly 80%.

A typical story of a low-valuation central enterprise stock doubling

As most of China International Capital Corporation's revenue comes from copper prices, the upward trend of copper prices in the past few years has brought great improvement to the company's profit side.

In 2016, the copper price was $4,500/ton. Moreover, the depreciation of the RMB exchange rate that year caused China International Capital Corporation to suffer a large loss of RMB 92 million for the whole year.

However, in 2017, the RMB exchange rate strengthened, and the copper price rose to above 7,000 yuan. In the third quarter of 2017, China International Capital Corporation's copper mine phase II expansion had reached production, with an additional production capacity of 22,000 tons/day. Following the rise in copper prices, China International Capital Corporation achieved its highest profit since its listing that year, with a net profit of RMB 413 million for the whole year.

However, at the beginning of 2018, due to the impact of the Fed's interest rate hike, global growth slowdown, and trade frictions, gold and copper prices began to fall, and the exchange rate weakened for two years, which once again dragged down the profits of gold companies. In 2018, China International Capital Corporation lost RMB 33 million, and in 2019, it lost RMB 229 million.

However, since 2020, China International Capital Corporation has started a sharp rise in its stock price.

This is mainly due to gold reaching a historical high of $1,970 in 2020, and copper prices benefiting from interest rate cuts after the Fed's interest rate cut. In 2020, China International Capital Corporation's net profit reached a historical high of RMB 731 million.

The Fed's interest rate cut supported copper prices until 2021, and copper prices rose by 22% in 2021, but gold prices fell by 4%. However, for China International Capital Corporation, which has a large proportion of revenue from copper, this is a time of significant improvement in profits.

So in 2021, Zhongjin International's net profit increased from 731 million yuan to 1.7 billion yuan, a year-on-year increase. The significant increase in net profit for two consecutive years has led to a five-fold increase in the company's stock price from 3.2 yuan in June 2020 to 29 yuan at the end of 2021.

After entering 2022, copper prices fell by nearly 5% compared to 2021, and gold prices fell and then rose, with a nearly flat decline for the whole year. Under the geopolitical factors last year, the medium- to long-term logic of gold prices was supported by central banks of various countries, which caused gold stocks to rebound ahead of schedule in the fourth quarter after two consecutive quarters of decline, and it was expected that the Fed's interest rate hike cycle would peak. Zhongjin International rose 9% throughout last year.

However, the current Fed interest rate hike cycle has not yet ended. But the upward trend of the US dollar continues to suppress the space for gold. In addition to the expectation of performance and the injection of assets by the parent company, another point is that Zhongjin International's PE is significantly lower than the valuation of A-share gold stocks mentioned above.

Horizontally comparing (in RMB), Zhongjin International's revenue in 2022 was 7.7 billion yuan, net profit was 1.551 billion yuan, and market value was 13.5 billion yuan. However, Yintai Gold's revenue in 2022 was 8.4 billion yuan, net profit was 1.244 billion yuan, and market value was 32.9 billion yuan.

Of course, there is a liquidity gap between Hong Kong stocks and A-shares. Better liquidity can bring greater premiums, which is certain. But Zhongjin International currently has only 8 times PE, which is definitely too cheap compared to A-share gold companies with 30 times PE. However, there are also reasons why Hong Kong stock valuations are more rational.

It is worth noting that the biggest risk of investing in gold stocks in A-shares or Hong Kong stocks is not how the company's mining assets are, but the concern that the management's operations on equity will cause short-term large-scale declines in stock prices. Therefore, when choosing gold stocks, investors should consider the changes in the company's equity.

For example, Yintai Gold announced in December last year that its largest shareholder, Shen Guojun, would transfer 20% of Yintai Gold's shares to Shandong Gold, with a premium rate of up to 92%. Although it was almost doubled for sale, Yintai Gold's stock price fell by 30% after the transfer.

In the medium- to long-term, Shandong Gold's high-premium acquisition certainly has confidence in the future prospects, but it also hurts investors who entered at high positions.

Of course, most shareholders will cash out and leave after the stock price rises, but the actions of central enterprise management in reducing holdings will be relatively small. This can avoid the degree of harm to investors caused by the reduction of major shareholders.

Conclusion

Zhongjin International's trend in the past few years is a typical undervalued cyclical resource stock. This year, it still has a dividend yield of 8%.

When choosing high-quality gold companies, companies with a higher proportion of gold should be selected. Currently, nearly 70% of Zhongjin International's revenue still comes from copper, and the market expects the parent company to inject gold mining assets to change the problem of excessive copper proportion. From a valuation perspective, Zhongjin International's valuation is also lower than its peers. However, in the case of upward pressure on copper prices this year, if there is an economic recession, gold companies with a high proportion of copper may see a decline in profits.

Admittedly, the US dollar interest rate hike has not ended yet, and even after the interest rate hike in May, the suppression of gold prices has not ended. But the wave of de-dollarization has already begun, and in the process of global de-dollarization, geopolitical frictions may increase, and gold is benefiting from this turbulent world.