Zhaojin Mining's 1H26 production was dragged by accidents, with higher gold prices only partially cushioning the earnings shortfall

Overview

This report assesses Zhaojin Mining's first-half 2026 results and the impact of accident-related production suspensions on output, costs, and earnings. Morgan Stanley sees a significant earnings shortfall and a potentially negative near-term market reaction, although improved overseas efficiency, lower leverage, and recent gold-price tailwinds provide a partial cushion.

Core views

Zhaojin Mining's 1H26 results fell short of Morgan Stanley's expectations. Gold prices rose 46.7% year over year during the period, but the company's net profit increased only 9.6% year over year to RMB1.58 billion, indicating that strong gold prices did not fully translate into earnings growth. General and other expenses declined 8.2% year over year to RMB1.5 billion due to lower impairment charges, providing some support to profit. However, other income plunged 87% year over year to RMB147 million because of lower gains from fair-value changes, offsetting part of the expense improvement. Production was the primary source of pressure on the period's results. Following two mine accidents, mined-gold production declined 21.9% year over year to 8 tonnes, and the mines involved remained suspended when the report was published. Overseas operations performed relatively well, with overseas mined-gold production increasing 33.4% year over year, driven by improved efficiency at the Abuja mine. Nevertheless, this was insufficient to offset lower domestic production, and total gold production fell 12.3% year over year to 12.5 tonnes. The report's reasoning is that accident-related suspensions not only directly reduced saleable output but also raised domestic unit costs through lower capacity utilization. Cost performance therefore showed a clear divergence between domestic and overseas operations. Domestic gold production costs increased from RMB216/gram in 1H25 to RMB323/gram in 1H26, up 49% year over year, which the report attributes to lower production. Overseas production costs declined from US$1,960/ounce in 1H25 to US$1,838/ounce in 1H26, down 6% year over year, reflecting higher overseas production and improved operating efficiency. Efficiency gains in the overseas business provided a partial cushion but were unable to reverse the drag on earnings from the group's overall production decline. On the balance sheet, the net gearing ratio was 52% at the end of 1H26, down 16% from the end of 2025. Despite the improvement in leverage, Morgan Stanley continues to identify increased borrowings and higher financing costs, which could constrain near-term earnings, as explicit downside risks, indicating that subsequent capital investment and financing arrangements will continue to affect profit realization. Morgan Stanley expects the market may react negatively to the results because earnings missed expectations and consensus EPS for the next 12 months faces a clear risk of downward revision. However, the report also believes that recent gold-price tailwinds may provide some support following the prior valuation de-rating. The stock is currently rated Equal-weight, with an Attractive industry view. The target price is HK$20.10, compared with the August 21, 2026 closing price of HK$25.52, implying 21% downside to the target price. The earnings forecast table shows revenue for the years ending December 2025, estimated 2026, estimated 2027, and estimated 2028 of RMB18.056 billion, RMB21.640 billion, RMB24.566 billion, and RMB35.607 billion, respectively; EBITDA of RMB7.093 billion, RMB9.401 billion, RMB11.341 billion, and RMB15.348 billion, respectively; and ModelWare net profit of RMB3.614 billion, RMB5.133 billion, RMB6.520 billion, and RMB9.199 billion, respectively. The EPS series marked “**” is RMB1.02, RMB1.45, RMB1.84, and RMB2.60, respectively, while the other EPS series marked “§” is RMB0.99, RMB1.51, RMB1.95, and RMB2.34, respectively. The report explains that “**” uses the consensus methodology, while “§” denotes consensus data provided by Refinitiv Estimates. Over the same forecast period, the P/E ratio declines from 27.1x to 15.1x, 11.9x, and 8.4x; EV/EBITDA declines from 16.2x to 9.4x, 7.4x, and 5.1x; and the P/B ratio declines from 4.0x to 2.3x, 1.9x, and 1.6x. ROE is 17.1%, 20.8%, 19.1%, and 23.0%, respectively, while the dividend yield is 0.4%, 0.6%, 0.8%, and 1.2%, respectively. The target price is derived using a base-case DCF model, with key assumptions including a 5.6% WACC, a beta of 1.2, and a 3% annual steady-state revenue growth rate.

Analysis framework

The report first compares 1H26 profit performance with gold prices during the period and Morgan Stanley's expectations, then breaks down the earnings shortfall into production, domestic and overseas unit costs, expenses, and changes in other income. It subsequently examines the net gearing ratio and assesses valuation using ModelWare earnings forecasts and DCF parameters. Finally, it constructs upside and downside scenarios based on gold prices, production, project execution, and financing costs.

Methodology notes

• Industry/Sector Analysis FrameworkPrice-Volume Decomposition

  Decomposition of gold prices, production, and unit production costs

  The report separately examines the increase in gold prices, changes in domestic and overseas production, and changes in unit costs to explain why net profit grew by only 9.6% despite a 46.7% year-over-year increase in gold prices.

• Valuation MethodDCF Discounted Cash Flow

  Base-case DCF valuation

  The report discounts future cash flows to present value, using a 5.6% WACC, a beta of 1.2, and a 3% annual steady-state revenue growth rate as target-price valuation assumptions.

• Company Fundamentals and Financial Framework

  Morgan Stanley ModelWare framework

  The report uses Morgan Stanley's ModelWare framework to generate forecasts for revenue, EBITDA, net profit, EPS, and valuation multiples, and uses them to examine the trajectory of earnings and valuation changes from 2025 to 2028.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Zhaojin Mining (1818.HK)

  The company is the direct subject of the report. Its 1H26 earnings were dragged by mine accidents, lower production, and higher domestic costs, while benefiting from higher gold prices and improved overseas efficiency.

  Strengths

  Overseas mined-gold production increased 33.4% year over year, while overseas unit costs declined 6% year over year; the net gearing ratio fell to 52%; and recent gold prices provided a tailwind.

  Weaknesses

  Mined-gold production declined 21.9% year over year, and the mines involved remain suspended; domestic unit costs increased 49% year over year; and other income declined 87% year over year.

  Comparison

  The report does not compare operating metrics with specific peers; the rating uses a relative rating framework within its Greater China materials industry coverage.

  Risks

  Lower gold prices, weaker-than-expected execution of new projects, and increased borrowings and financing costs may constrain near-term earnings.

Key data

• 1H26 net profitRMB1.58 billionUp 9.6% year over year and below Morgan Stanley's expectations
• Change in gold prices during the period+46.7%Year-over-year change
• General and other expensesRMB1.5 billionDown 8.2% year over year, mainly due to lower impairment charges
• Other incomeRMB147 millionDown 87% year over year, mainly due to lower gains from fair-value changes
• Mined-gold production8 tonnesDown 21.9% year over year due to two mine accidents and continuing production suspensions
• Overseas mined-gold production+33.4%Year-over-year growth, driven by improved efficiency at the Abuja mine
• Total gold production12.5 tonnesDown 12.3% year over year
• Domestic gold production costRMB323/gramRMB216/gram in 1H25, up 49% year over year in 1H26
• Overseas gold production costUS$1,838/ounceUS$1,960/ounce in 1H25, down 6% year over year in 1H26
• Net gearing ratio at the end of 1H2652%Down 16% from the end of 2025
• Target price and closing priceHK$20.10／HK$25.52Closing price as of August 21, 2026; implies -21% to the target price
• 2025–2028 revenueRMB18.056 billion／RMB21.640 billion／RMB24.566 billion／RMB35.607 billion2026–2028 figures are estimates
• 2025–2028 ModelWare net profitRMB3.614 billion／RMB5.133 billion／RMB6.520 billion／RMB9.199 billion2026–2028 figures are estimates
• Key DCF assumptionsWACC 5.6%, beta 1.2, steady-state revenue growth rate 3%/yearBase-case target-price valuation parameters
• 52-week share-price rangeHK$15.82—HK$42.36Range stated in the report
• Diluted shares outstanding3.542 billion sharesCurrent share count stated in the report
• Market capitalization／enterprise value／average daily trading valueUS$11.531 billion／US$14.113 billion／US$66.10 millionCurrent metrics stated in the report

Impact & implications

The report believes that lower production and higher domestic costs caused by accident-related suspensions constrained the earnings sensitivity to higher gold prices, so the near-term reaction following the results may be negative. Improved overseas operating efficiency, a lower net gearing ratio, and recent gold-price tailwinds may provide a partial cushion, but the target price remains 21% below the closing price stated in the report.

Risks

• An upside risk is stronger-than-expected gold prices.
• An upside risk is production growth exceeding expectations.
• A downside risk is a decline in gold prices amid a stronger US dollar.
• New projects are subject to execution risks.
• Increased borrowings may raise financing costs and weigh on near-term earnings.