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MONDAY, 27 APRIL 2015

Nickel Asia Corporation:

Outlook dims on weakening end-user demand;


downgrading to SELL

Metal prices still under pressure due to weakening demand. While the Indonesian ore ban
will likely stay in place, NIKL disclosed that average realized metal prices in 1Q15 were on a
downtrend. Management attributed this to weakening end-user demand, particularly by stainless
steel producers, which account for ~80% of end-user demand for nickel. Data from Bloomberg
confirms this, as steel output growth y/y in China has slowed to 3.6% y/y in 1Q15 from 6.4% y/y
in 4Q14 (Exhibit 1). Output growth rates have also fallen from their highs in the 2013 period.

Assuming flattish prices moving forward. Despite managements expectations that metal
prices will recover moving forward, we are assuming a more cautious stance given that underlying
end-use demand continues to weaken. For instance, total commercial and residential sales in
China contracted by 9.2% y/y and 9.8% y/y, respectively in 1Q15. Moreover, property sales
growth rates in China have been consistently negative since 1Q14. Note that the real estate
construction industry accounts for ~50% of end-user demand for steel.

Reducing estimates. We are reducing our full-year average metal price assumptions by 27.8%
to US$6.5/lb for LME-linked volume, and by 46% to US$32.4/WMT for negotiated contract prices.
These prices are based on the average realized prices seen by NIKL for the 1Q15 period. The
said changes led to a 58% and 64.3% decrease in our earnings estimates for 2015 and 2016,
respectively. The said changes also led to a 47.2% decrease in our FV estimate to Php15.00/
sh from Php28.40/sh.
Valuations not compelling; downgrading to SELL. We are downgrading our rating on NIKL
from a HOLD to a SELL with a lower FV estimate of Php15.00/sh from Php28.40/sh previously.
Although the Indonesian ore ban is likely to remain in place, we believe it will no longer be able to
drive ore prices higher like it did the previous year given the continued weakening of underlying
end-user demand for steel and therefore nickel. Valuations are not compelling either, as NIKL
is trading at a 38.7% premium to our revised FV estimate based on its latest close, implying a
potential downside of 27.9%. Moreover, assuming that NIKL sees realized prices for the year
recover to their 2014 average levels, our FV estimate would increase to only Php19.90/sh,
implying that NIKL is fairly valued at best.
FORECAST SUMMARY
Year to Dec. 31
Sales
% change y/y
EBIT
% change y/y
EBIT Margin (%)
EBITDA
% change y/y
EBITDA Margin (%)
Net Profits
% change y/y
NPM (%)
EPS (Php)
% change y/y
RELATIVE VALUE
P/E(X)
P/BV(X)
ROE(%)
Dividend yield (%)
Source: NIKL, COL est imat es

2012
11,606.9
(8.6)
4,334.5
(38.2)
37.3
5,316.4
(31.4)
45.8

2013
11,109.5
(4.3)
3,672.2
(15.3)
33.1
4,934.8
(7.2)
44.4

2014E
23,554.7
112.0
15,792.6
330.1
67.0
17,095.5
246.4
72.6

2015E
19,593.6
(16.8)
10,535.1
(33.3)
53.8
11,818.0
(30.9)
60.3

2016E
19,136.6
(2.3)
10,184.3
(3.3)
53.2
11,427.0
(3.3)
59.7

2,207.2
(37.6)
19.0
0.58
(37.6)

2,053.7
(7.0)
18.5
0.54
(7.0)

8,788.0
327.9
37.3
2.32
326.8

6,186.6
(29.6)
31.6
1.63
(29.6)

6,057.6
(2.1)
31.7
1.60
(2.1)

34.4
4.0
11.7
2.2

37.0
3.7
10.0
1.6

12.3
2.4
19.8
3.5

12.6
2.2
17.1
2.4

8.7
2.8
31.8
0.8

SHARE DATA

SELL

Rating
Ticker
Fair Value (Php)
Current Price
Upside (%)

NIKL
15.00
22.40
-33.04

SHARE PRICE MOVEMENT


120
110
100
90
80
70
60
27-Jan-15

27-Feb-15
NIKL

27-Mar-15

27-Apr-15

PSEi

ABSOLUTE PERFORMANCE
NIKL
PSEi

1M
-19.41
0.90

3M
-16.14
4.17

YTD
-28.51
9.93

MARKET DATA
Market Cap
Outstanding Shares
52 Wk Range
3Mo Ave Daily T/O

85,027.84Mil
3,795.89Mil
15.87 - 32.44
136.98Mil

Garie Ouano
garie.ouano@colfinancial.com

PHILIPPINE EQUITY RESEARCH

Indonesian ore ban likely to stay


Management believes that the ore ban on nickel ore exports is likely to remain despite reports
suggesting that the ban on bauxite exports may not. Recall that recent media reports suggested that
the ban on bauxite exports might be lifted in order to help Indonesian miners raise more capital for
bauxite smelting plants. Following this, speculations arose that the same could be done for nickel ore
exports for the same reason.
Despite these speculations, management believes that the Indonesian government is not likely to
lift the ban on nickel since nickel smelting plants are not as capital-intensive as bauxite smelting
plants. According to management, the cost to construct a bauxite smelting plant is twice or thrice that
of a nickel smelting plant. Thus, the impetus to lift the ban for nickel is not as compelling as it is for
bauxite. According to data from Bloomberg, contained nickel capacity from Indonesian smelters is
still estimated to reach 108,000 tons to 183,000 tons per annum by 2020, from nil in 2014.

Metal prices still under pressure due to weakening demand


While the Indonesian ore ban is still in place, NIKL disclosed that average realized metal prices in
1Q15 were on a downtrend. Management attributed this to weakening end-user demand, particularly
by stainless steel producers, which account for ~80% of end-user demand for nickel. Data from
Bloomberg confirms this, as steel output growth y/y in China has slowed to 3.6% y/y in 1Q15 from
6.4% y/y in 4Q14 (Exhibit 1). Moreover, Chinese steel output growth rates have fallen from their highs
of ~15% y/y in 3Q13.
As a consequence of weakening demand, nickel pig iron (NPI) production in China is expected to
decline to 350,000 tons this year from ~450,000 tons last year.
Exhibit 1: China steel output growth (% y/y)
18
16
14
12
10
8
6
4
2
0

2012 Q3 2012 Q4 2013 Q1 2013 Q2 2013 Q3 2013 Q4 2014 Q1 2014 Q2 2014 Q3 2014 Q4 2015 Q1
Chinese steel output growth (% y/y)

Source: Bloomberg

THURSDAY, 16 APRIL 2015

NIKL

COMPANY UPDATE

page 2

PHILIPPINE EQUITY RESEARCH

Assuming flattish prices moving forward


Despite managements expectations that metal prices will recover moving forward, we are assuming
a more cautious stance given that underlying end-use demand continues to weaken. For instance,
total commercial and residential sales in China contracted by 9.2% y/y and 9.8% y/y, respectively in
1Q15. Moreover, property sales growth rates in China have been on a downtrend since 2Q13 (Exhibit
3), and have been consistently negative since 1Q14. Note that the real estate construction industry
accounts for ~50% of end-user demand for steel.
Exhibit 2: China property sales growth (%, y/y)
50
40
30
20
10
0
-10
-20

2012 Q2 2012 Q3 2012 Q4 2013 Q1 2013 Q2 2013 Q3 2013 Q4 2014 Q1 2014 Q2 2014 Q3 2014 Q4 2015 Q1
Commercial space sold (% growth y/y)

Residential floor space sold (% growth y/y)

Source: Bloomberg

Reducing estimates
We are reducing our full-year average metal price assumptions by 27.8% to US$6.5/lb for LMElinked volume, and by 46% to US$32.4/WMT for negotiated contract prices. These prices are based
on the average realized prices seen by NIKL for the 1Q15 period. As mentioned earlier, we are now
more skeptical about potential further increases in metal prices given that the underlying demand
drivers for nickel continue to weaken. Thus, we are assuming that metal prices will be flat relative to
1Q15 levels, on average. Moreover, we believe our metal price assumptions are optimistic already
as they are higher than current levels. LME nickel is currently at US$6.0/lb, while contract prices for
mid-grade ore is currently at US$24-25/WMT, according to management.
The said changes led to a 43.7% and 50.6% decrease in our shipment revenue forecasts for 2015
and 2016, respectively. This also led to a 58% and 64.3% decrease in our earnings estimates for
2015 and 2016, respectively. Finally, the said changes led to a 47.2% decrease in our FV estimate
to Php15.00/sh from Php28.40/sh.

THURSDAY, 16 APRIL 2015

NIKL

COMPANY UPDATE

page 3

PHILIPPINE EQUITY RESEARCH

Exhibit 3: COL forecast summary changes

Average contract price (US$ per WMT)


LME price (US$ per lb)
Total production (Mil WMT)
Shipment revenues (Php Mil)
Net income (Php Mil)

2015
2016
% Change
Old
New
Old
New
60
32.4
-46.0%
70
32.4
9
6.5
-27.8%
9
6.5
19.0
19.0
0.0%
19
19
33,682 18,970
-43.7% 37,482 18,513
14,736 6,187
-58.0% 16,987 6,058

% Change
-53.7%
-27.8%
0.0%
-50.6%
-64.3%

Source: COL estimates

Valuations not compelling; downgrading to SELL


We are downgrading our rating on NIKL from a HOLD to a SELL with a lower FV estimate of
Php15.00/sh from Php28.40/sh previously. Although the Indonesian ore ban is likely to remain in
place, we believe it will no longer be able to drive ore prices higher like it did the previous year given
the continued weakening of underlying end-user demand for steel and therefore nickel.
Valuations are not compelling either, as NIKL is trading at a 38.7% premium to our revised FV
estimate based on its latest close of Php20.80/sh, implying a potential downside of 27.9%. Moreover,
assuming that NIKL sees realized prices for the year recover to their 2014 average levels, our FV
estimate would increase to only Php19.90/sh, implying that NIKL is fairly valued at best. While NIKL
is trading at a 2015E EV/EBITDA multiple of 5.7X, lower than the 6.4X global median, we believe the
discount is warranted given that NIKLs mine life is around 37.5% shorter than its global peer group,
and that other companies within the said peer group have other operations covering other metals
besides nickel.
Exhibit 4: Relative Valuation
Company name
Vale Indonesia
BHP Billiton
Rio Tinto
Anglo American Plc
Vale SA
Marventures Holdings
Glencore PLC
Freeport McMoran
Nickel Asia Corp.

15E EV/EBITDA
4.85
6.25
7.36
6.30
6.47
1.73
9.43
7.50
5.73

15E P/S
2.10
2.16
1.94
0.85
0.92
1.25
0.31
1.16
3.89

6.24
6.39

1.34
1.21

Average ex-NIKL
Median ex-NIKL
Source: Bloomberg, COL estimates

THURSDAY, 16 APRIL 2015

NIKL

COMPANY UPDATE

page 4

PHILIPPINE EQUITY RESEARCH

Investment Rating Definitions

BUY

HOLD

SELL

Stocks that have a BUY rating have attractive


fundamentals and valuations, based on
our analysis. We expect the share price
to outperform the market in the next six to
twelve months.

Stocks that have a HOLD rating have either


1.) attractive fundamentals but expensive
valuations; 2.) attractive valuations but
near term earnings outlook might be poor
or vulnerable to numerous risks. Given the
said factors, the share price of the stock may
perform merely inline or underperform the
market in the next six to twelve months.

We dislike both the valuations and


fundamentals of stocks with a SELL rating.
We expect the share price to underperform in
the next six to twelve months.

Important Disclaimers
Securities recommended, offered or sold by COL Financial Group, Inc.are subject to investment risks, including the possible loss of the principal amount
invested. Although information has been obtained from and is based upon sources we believe to be reliable, we do not guarantee its accuracy and it may
be incomplete or condensed. All opinions and estimates constitute the judgment of COLs Equity Research Department as of the date of the report and are
subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a
security. COL Financial ans/or its employees not involved in the preparation of this report may have investments in securities or derivatives of securities of
securities of the companies mentioned in this report, and may trade them in ways different from those discussed in this report.

2401-B East Tower, Philippine Stock Exchange Centre, Exchange Road, Ortigas Center, Pasig City, 1605 Philippines
Tel: +632 636-5411

THURSDAY, 16 APRIL 2015

NIKL

Fax: +632 635-4632

COMPANY UPDATE

Website: http://www.colfinancial.com

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