Divesting over 60 billion from non-core businesses, the truth behind the market's misunderstanding of Metallurgical Corporation of China (01618)

With a separation worth over 60 billion yuan, the focus on the core business is not favored by the market. Metallurgical Corporation of China (01618) issued an announcement causing its stock price to drop by 21%, leading to a market value reduction of over 10 billion Hong Kong dollars. It was reported that recently, Metallurgical Corporation of China released an announcement, planning to sell all the equity of MCC Real Estate to MINMETALS LAND for approximately 31.24 billion yuan and transfer related debt, as well as sell the entire equity of CIL, HUAYE, MCC Copper & Zinc, and Ruimu Management held by the controlling shareholder China Minmetals for about 29.44 billion yuan, along with 67.02% of MCC Metal Ji. The total consideration for this sale is 60.676 billion yuan. The premium paid for this transaction compared to the net assets of the targets is very high, which will result in a significant increase in net assets after the sale is completed. According to the disclosure, this divestment of non-core assets aims to optimize resource allocation, improve the company's business structure, focus on core businesses, and enhance core competitiveness. In the future, the company will focus on metallurgical engineering, non-ferrous and mining engineering construction and operation, high-end infrastructure, industrial construction, and emerging industries, promoting high-quality development of its business. However, the market does not seem to be convinced. Following the announcement, the stock price plummeted by over 20% the next day in the Hong Kong stock market, and the A-shares also experienced a significant decline after opening low, leading to another drop on the following day. What impact will this large-scale divestiture of non-core assets have on the company's fundamentals, and will it affect its sustainable operation? Value-added divestiture of non-core businesses may significantly increase net assets It was found that the main sources of income for Metallurgical Corporation of China are mainly divided into three categories: engineering contracting business, including metallurgical construction, construction, and municipal engineering; characteristic businesses, including mineral resources, engineering services, new materials, high-end equipment, and energy conservation and environmental protection; and integrated real estate, mainly operated by MCC Real Estate. The company's core business is the engineering contracting business, and according to the financial report for the first half of 2025, the revenue share of the three businesses is 90.3%, 7.62%, and 2%, respectively. The six targets being sold had a total revenue of 12.208 billion yuan from January to July, accounting for only 5.1% of the total revenue (based on the first half of the year). Due to the loss in the real estate target, the total net profit of the six targets was -1.841 billion yuan. Additionally, the total assets of the six targets amounted to 83.636 billion yuan, accounting for 9.75% of the total assets. It can be seen that this divestiture will have a relatively small impact on the company's revenue performance; however, it will eliminate loss-making assets and improve the company's profitability. It is worth noting that the total consideration for the assets sold is 606.76 billion yuan, with a very high premium compared to the net assets of the targets. MCC Real Estate has been incurring losses due to the downturn in the real estate industry, with a net asset of -16.276 billion yuan as of July 2025. However, this transaction also includes the sale of 46.164 billion yuan in debt owed by the company to this target, equivalent to the target having a net asset of 29.888 billion yuan. The consideration for this part of the transaction is 31.237 billion yuan, representing an increase of 1.349 billion yuan, or a 4.5% increase. In addition, the consideration for MCC Copper & Zinc is 12.24 billion yuan, an increase of 7.915 billion yuan, or 182.99%; the consideration for Ruimu Management is 0.1 billion yuan, an increase of 0.1 billion yuan; the consideration for MCC Metal Ji is 50.36 billion yuan, an increase of 32.68 billion yuan, or 183.5%; the consideration for HUAYE DUDA is 16.57 billion yuan, an increase of 14.7 billion yuan, or 789.6%; and the consideration for CIL is 104.96 billion yuan, an increase of 58.42 billion yuan, or 12.53%. The buyers of this transaction, China Minmetals and MINMETALS LAND, will make two payments. The first payment, which is 50% of the total consideration, will be made within 20 days after the respective board of directors formally approve the transaction, and the second payment will be made on the delivery date. The net assets of the six targets have increased by 19.854 billion yuan. After the sale is completed, it will result in an 11% increase in Metallurgical Corporation of China's net assets, bringing in over 60 billion yuan in cash flow. Coupled with the cash reserves as of the first half of the year, the company will have cash on hand exceeding 100 billion yuan. The company has disclosed that the funds will be used to strengthen the core business of metallurgical construction, develop advanced research platforms, promote new industrialization and urbanization, conduct research and development on advanced construction technologies and equipment upgrades, as well as develop characteristic businesses such as engineering services, new materials, and high-end equipment. Weak performance and focused development, valuation rollback gives opportunity for long-term investors Metallurgical Corporation of China's performance in the past two years has not been impressive, with a year-on-year decrease in revenue and net profit of shareholders of 13%, 18.8%, 22.1%, and 41.9% for the first three quarters of 2024 and 2025, respectively. The three major businesses, engineering contracting, characteristic businesses, and integrated real estate, all showed a downward trend, with the engineering contracting business having a large share of revenue and a continuous double-digit decline, with a 21.8% decline in revenue in the first half of the year. The real estate business has been a major contributor to losses, dragging down overall profitability. Within the company's engineering contracting business, metallurgical construction accounts for 21.93%, while building and municipal engineering account for 78.07%. The company's core business has strong competitive advantages, with 12 first-class scientific research and design institutes, 15 construction companies, and 5 comprehensive first-class design qualifications and 50 special contracting qualifications. Among them, there are 6 special-grade construction companies, 2 triple-grade construction companies, and 4 double-grade construction companies, ranking at the forefront of the country. Metallurgical construction is the traditional core business of the company, covering new construction, expansion, and intelligence, green, and efficient transformation projects in the steel and non-ferrous industries, as well as operating services for steel and non-ferrous industries. In the first half of 2025, the total amount of key metallurgical construction projects targeted and signed exceeded 10 billion yuan. Building and municipal engineering is the company's most core business, including high-rise buildings, large-scale urban area construction and renovation projects, as well as advanced highways and rail transportation, etc., where there are relatively advantageous projects in transportation, municipal infrastructure, water conservancy, and communication engineering. In the first half of 2025, the total value of key building and municipal engineering projects targeted and signed exceeded 36 billion yuan. By divesting non-core businesses, the company has not only separated a loss-making real estate business, reducing the pressure on future performance, but also brought in a substantial amount of funds to support the development of its core business. The company disclosed that the funds obtained will mainly be used to support the company's diversified business system of "one core, two main bodies, and five characteristics," strengthen the core business of metallurgical construction, solidify the two main businesses of new industrialization and urbanization, and cultivate five characteristics of characteristic businesses, such as engineering services, new materials, high-end equipment, energy conservation and environmental protection, and digital applications. Due to its real estate business, Metallurgical Corporation of China's operating cash flow has been in a significant net outflow in recent years. However, the profitability of its core business has been improving, with a gross profit margin of 9.58% in the first half of 2025, an increase of 1.08 percentage points year-on-year. The gross profit margin of characteristic businesses is relatively high, reaching 17.62%, an increase of 0.99 percentage points year-on-year. By divesting the real estate business, it is expected that the overall gross profit margin will improve, and operating cash flow will be optimized. In summary, the divestment of non-core businesses by Metallurgical Corporation of China has a relatively low impact on its assets and revenue, as the target businesses have a small proportion in these aspects. However, the divestiture of the heavily loss-making real estate business will significantly enhance profitability and the return of funds will support the development of the core business. The company has also been actively rewarding shareholders, distributing dividends every year since 2013 with an average dividend ratio of about 20%, resulting in a current dividend yield of approximately 3.4%. Clearly, the market's reaction to Metallurgical Corporation of China's divestiture was exaggerated. However, the valuation rollback presents an opportunity for long-term investors who are optimistic about the company's future prospects. Currently, the company's PB valuation is only 0.3 times, indicating a high potential for value investment.