Nickel Asia Corporation MON 10 AUG 2020

1H20 earnings trail forecast on

weaker than expected sales volume,
but stronger 2H20 expected
For 1H20, net profit declined 42.2% to Php401Mil, below COL (14.1%) and consensus (16.2%)
BUY
forecasts. The decline in earnings was primarily due to the decline in ore revenues as well as TICKER: NIKL
the booking of mark to market loss from NIKL’s portfolio investments. Ore revenues declined FAIR VALUE: 3.06
13.6% to Ph6Bil, representing 42.6% of our full year forecast. Operating expenses declined CURRENT PRICE: 3.02
10.8% to Php5.3Bil, representing 55.6% of our full year forecast. Investments in HPAL UPSIDE: 1.32
contributed losses of Php70Mil during the period, compared to our earnings contribution
estimate of Php267Mil for the year.
SHARE PRICE MOVEMENT

Management sees stronger 2H20. Despite the weaker than expected 1H20, management 190

sees better performance in 2H20 brought about by a recovery in production volume and 180
170
better pricing. While 1H20 shipment volume declined 19.7% y/y, for the full year, the 160

company still expects total production volume to be at par with 2019’s production volume
150
140

of 19Mil WMT, indicating that 2H20 volume will be significantly higher than the first half. 130
120
The average selling price for 2H20 will also likely be higher compared to the first half given 110
100
that the current LME price of US$6.40/lb is already 12.5% higher than average prices in 90

1H20. 80
10-May-20 10-Jun-20 10-Jul-20 10-Aug-20

NIKL PSEi

ABSOLUTE PERFORMANCE

FORECAST SUMMARY 1M 3M YTD

NIKL 45.89 96.10 -10.91
Year to December 31 (Php Mil) 2017 2018 2019 2020E 2021E 2022E
Revenues 15,739 18,648 17,923 14,660 14,920 15,063 PSEi -5.25 4.45 -24.86
% change y/y 11.4 18.5 (3.9) (18.2) 1.8 1.0
EBITDA 6,888 7,392 6,639 6,686 6,954 7,161
% change y/y 24.2 7.3 (10.2) 0.7 4.0 3.0 MARKET DATA
EBITDA margin (%) 43.8 39.6 37.0 45.6 46.6 47.5
EBIT 5,408 6,039 5,241 5,159 5,344 5,468 Market Cap 41,165.17Mil
% change y/y 32.8 11.7 (13.2) (1.6) 3.6 2.3 Outstanding Shares 13,630.85Mil
EBIT margin (%) 34.4 32.4 29.2 35.2 35.8 36.3 52 Wk Range 1.40 - 5.10
Net income 2,771 3,008 2,685 2,845 3,383 3,470 3Mo Ave Daily T/O 30.96Mil
% change y/y 40.9 8.6 (10.7) 5.9 18.9 2.6
Net margin (%) 17.6 16.1 15.0 19.4 22.7 23.0
EPS (Php) 0.36 0.22 0.20 0.21 0.25 0.25
% change y/y 40.9 (39.7) (10.7) 5.9 18.9 2.6

RELATIVE VALUE
P/E (X) 5.7 9.4 10.5 9.9 8.3 8.1
P/BV (X) 0.5 1.0 0.9 0.8 0.8 0.7 George Ching
ROE (%) 9.8 10.2 8.8 8.8 9.8 9.4 Senior Research Manager
Dividend yield (%) 3.9 8.3 5.3 4.8 5.0 6.0 george.ching@colfinancial.com
so urce: NIKL, COL estimates

Disclaimer: All content provided in COL Reports are meant to be read in the COL Financial website. Accuracy and completeness of content cannot be guaranteed if reports are viewed outside of
the COL Financial website as these may be subject to tampering or unauthorized alterations.
 EARNINGS ANALYSIS I NIKL: 1H20 EARNINGS TRAIL FORECAST ON WEAKER THAN EXPECTED
SALES VOLUME, BUT STRONGER 2H20 EXPECTED

MON 10 AUG 2020

1H20 earnings trail forecast on weaker than expected sales

volume

NIKL posted 2Q20 net profit declined 13.3% to Php491Mil. For 1H20, net profit declined
42.2% to Php401Mil, below COL (14.1%) and consensus (16.2%) forecasts. The decline in
earnings was primarily due to the decline in ore revenues as well as the booking of mark
to market loss from NIKL’s portfolio investments. Ore revenues declined 13.6% to Ph6Bil,
representing 42.6% of our full year forecast. Operating expenses declined 10.8% to
Php5.3Bil, representing 55.6% of our full year forecast. Investments in HPAL contributed
losses of Php70Mil during the period, compared to our earnings contribution estimate
of Php267Mil for the year.

Exhibit 1: Results Summary

% % % of forecasts
in PhpMil 2Q19 2Q20 1H19 1H20
Change Change COL Consensus
Revenues 5,431 4,467 (17.7) 7,406 6,642 (10.3) 45.3 46.1
Operating income 1,167 918 (21.3) 1,573 1,359 (13.6) 26.3 23.9
Operating margin (%) 21.5 20.6 - 19.5 20.5 - - -
Net income 566 491 (13.3) 694 401 (42.2) 14.1 16.2
Net margin (%) 10.4 11.0 - 9.6 6.0 - - -

source: NIKL, Bloomberg, COL estimates

Revenues trail estimates on weaker than expected sales

volume, ore prices stronger than expected

1H20 ore revenues declined 13.6% y/y to Php6Bil, representing 42.6% of our full year
forecast. Shipment volume declined 19.7% to 7.3Mil WMT, representing 44% of our full
year forecast. The decline in volume was primarily due to production disruption as a
result of the ECQ that was implemented during the month of April and May. The decline
in sales volume was partially offset by an increase in ore prices. In terms of pricing,
NIKL’s results are better than expected with average LME price rising 2.3% to US$5.69/
lb, representing 99.8% of our full year forecast, while average contract price increasing
22.9% to US$25.44/WMT, representing 108.7% of our full year forecast.

COL Financial Group, Inc. 2

 EARNINGS ANALYSIS I NIKL: 1H20 EARNINGS TRAIL FORECAST ON WEAKER THAN EXPECTED
SALES VOLUME, BUT STRONGER 2H20 EXPECTED

MON 10 AUG 2020

Exhibit 2: 1H20 shipment results

2Q19 2Q20 % Change 1H19 1H20 % Change % of COL forecasts

Shipment volume (Mil WMT) 6.2 4.5 -27.1 9.1 7.3 -19.7 44.0
Average contract price (US$/WMT) - - 20.7 25.44 22.9 108.7
Average LME price (US$/lb) - - 5.56 5.69 2.3 99.8
Shipment value (Php Bil) 4.0 3.2 -20.7 6.9 6.0 -13.6 42.6

source: NIKL, COL estimates

Operating costs above forecast

NIKL’s 1H20 operating cost (including GAEX and marketing) declined by 10.8% to
Php5.3Bil, representing 55.6% of our full year forecast. Operating cash cost per WMT
increased 1.5% to Php538/WMT.

Management sees stronger 2H20

Despite the weaker than expected 1H20, management sees better performance in 2H20
brought about by a recovery in production volume and better pricing. While 1H20
shipment volume declined 19.7% y/y, for the full year, the company still expects total
production volume to be at par with 2019’s production volume of 19Mil WMT, indicating
that 2H20 volume will be significantly higher than the first half. The average selling price
for 2H20 will also likely be higher compared to the first half given that the current LME
price of US$6.40/lb is already 12.5% higher than average prices in 1H20.

Maintaining BUY rating

We have a BUY rating on NIKL with a FV estimate of Php3.06/sh. We believe that despite
the impact of the Covid-19 pandemic, near term prices for nickel will continue to be
supported by the Indonesian nickel ore export ban. Furthermore, we remain positive
on the long-term outlook for nickel due to the rising electric vehicle battery demand. At
NIKL’s current price of Php2.82/sh, upside to our FV estimate is at 8.5%.

COL Financial Group, Inc. 3

 EARNINGS ANALYSIS I NIKL: 1H20 EARNINGS TRAIL FORECAST ON WEAKER THAN EXPECTED
SALES VOLUME, BUT STRONGER 2H20 EXPECTED

MON 10 AUG 2020

Nickel Asia INCOME STATEMENT (IN PHPMIL)

Corporation (NIKL) Revenues

2017
15,739
2018
18,648
2019
17,923
2020E
14,660
2021E
14,920
2022E
15,063
% Growth 11.4% 18.5% -3.9% -18.2% 1.8% 1.0%
COMPANY BACKGROUND EBITDA 6,888 7,392 6,639 6,686 6,954 7,161
Nickel Asia Corporation (NIKL) primarily % Growth 24.2% 7.3% -10.2% 0.7% 4.0% 3.0%
EBIT 5,408 6,039 5,241 5,159 5,344 5,468
engages in the business of mining of all
% Growth 32.8% 11.7% -13.2% -1.6% 3.6% 2.3%
kinds of ore, metals and minerals and in EPS 0.36 0.22 0.20 0.21 0.25 0.25
the business of generation, transmission, % Growth 40.9% -39.7% -10.7% 5.9% 18.9% 2.6%
distribution and supply of electricity to
cities and other localities. The Company BALANCE SHEET (IN PHPMIL)
exports saprolite and limonite ore to 2017 2018 2019 2020E 2021E 2022E
customers in Japan, China and Australia. Cash & Equivalents 15,572 15,015 16,569 17,587 20,305 23,584
Trade Receivables 905 1,057 1,066 922 939 949
The Company owns four operating mines,
Inventories 3,502 3,744 3,995 2,806 2,767 2,767
namely: Rio Tuba, Taganito, Cagdianao and
Other Current Assets 919 1,165 393 393 393 393
Taganaan sites, all of which are located in PPE 15,388 15,078 16,028 16,063 16,014 15,883
the southern half of the country. Apart from Other Non-Current Assets 9,450 9,973 10,211 12,073 12,899 13,389
which, the Company has five properties in Total Assets 45,737 46,032 48,262 49,844 53,318 56,965
various stages of exploration for nickel. Accounts Payable 7,570 7,665 7,531 6,234 6,177 6,181
ST Debts - 1,492 1,492 - - -
REVENUE BREAKDOWN Other Current Liabilities 2,044 709 897 910 910 903
LT Debts 1,349 1,289 930 2,735 2,611 2,486
Other Non-Current Liabilities 1,555 1,427 2,280 1,693 1,686 1,686
3.9% Total Liabilities 12,519 12,582 13,131 11,573 11,384 11,256
3.9%
Total Equity 33,218 33,450 35,131 38,271 41,934 45,709
Total Liabilities & Equity 45,737 46,032 48,262 49,844 53,318 56,965

CASHFLOW STATEMENT (IN PHPMIL)

2017 2018 2019 2020E 2021E 2022E
Net Income 3,726 4,157 3,691 4,052 4,575 4,688
Depreciation & Amortization 1,480 1,353 1,398 1,527 1,610 1,693
96.1%
96.1% Other Non-Cash Exp (Gains) (198) (348) (10) (268) (827) (859)
Decrease (Increase) in Working Cap 529 -544 377 37 -35 -6
Sale of nickel Others Operating Cash Flow 5,537 4,618 5,456 5,348 5,323 5,515
Sale of nickel Others Capex -1,494 -1,144 -2,196 -1,561 -1,561 -1,561
Other Investments 25 25 -89 0 0 369
Investing Cash Flow -1,469 -1,119 -2,286 -1,561 -1,561 -1,192
Proceeds (Payment) Debts -1,816 -88 214 -262 -132 -132
Payment of Cash Dividends -2,556 -3,602 -1,504 -1,342 -1,422 -1,692
Others -1 -1 -1 -1 -1 -1
Financing Cash Flow -4,372 -3,691 -1,290 -1,605 -1,554 -1,824
Change in Cash -304 -192 1,880 2,181 2,207 2,500

COL Financial Group, Inc. 4

 EARNINGS ANALYSIS I NIKL: 1H20 EARNINGS TRAIL FORECAST ON WEAKER THAN EXPECTED
SALES VOLUME, BUT STRONGER 2H20 EXPECTED

MON 10 AUG 2020

INVESTMENT THESIS: KEY RATIOS

2017 2018 2019 2020E 2021E 2022E
Nickel price long term outlook improves
EBITDA Margin (%) 44% 40% 37% 46% 47% 48%
on EV production boom NPM (%) 18% 16% 15% 19% 23% 23%
The long term price outlook for nickel has Current Ratio (X) 2.1 2.0 2.2 3.0 3.4 3.9
improved due to the EV production boom. Days Receivable 24 24 24 24 24 24
Investors are anticipating a boom in EVs as Days Inventory 187 187 187 187 187 187
developed countries are starting to create Days Payable 362 362 362 362 362 362
Asset T/O (%) 34% 41% 37% 29% 28% 26%
regulations that would push automakers
to build more EVs. The resulting boom in
the demand for EV batteries as a result of
increased production of EVs is expected to
act as a tailwind for nickel prices in the next
few years. With the increased nickel price,
the company’s revenues will also be able to
pick up and help earnings to grow moving
forward.

Near term prices to be supported by

Indonesian nickel ore export ban
Despite the impact of the Covid-19
pandemic, near term prices for nickel will
continue to be supported by the Indonesian
nickel ore export ban.

COL Financial Group, Inc. 5

 EARNINGS ANALYSIS I NIKL: 1H20 EARNINGS TRAIL FORECAST ON WEAKER THAN EXPECTED
SALES VOLUME, BUT STRONGER 2H20 EXPECTED

MON 10 AUG 2020

Valuation RELATIVE VALUATION

Methodology 2018E
P/E
2019E
EPS Growth
2018E 2019E
Philex Mining Corp. 16.4 27.7 -19.6% -40.7%
Oceanagold Corp. 16.6 17.2 -29.4% -3.5%
HudBay Minerals Inc. 13.1 10.5 -26.9% 24.8%
Zijin Mining Group Co Ltd 14.2 12.7 28.1% 11.7%
Minera Frisco SAB de CV 37.7 5.9 633.3% 540.9%
Nickel Asia Corp. 11.4 11.2 6.9% 1.3%
Median 15.30 11.97 -0.06 0.07

VALUATION ASSUMPTIONS

Risk premium 9.0%

Risk free rate 4.0%
Beta 1.10
Cost of equity 13.9%
Cost of debt 2.1%
Tax rate 30.0%
WACC 11.5%

Enterprise value 26,723

Less: (Net debt) / net cash 15,172
Equity value 41,895
Number of outstanding shares (Mil) 13,685
Equity value per share 3.06

COL Financial Group, Inc. 6

 EARNINGS ANALYSIS I NIKL: 1H20 EARNINGS TRAIL FORECAST ON WEAKER THAN EXPECTED
SALES VOLUME, BUT STRONGER 2H20 EXPECTED

MON 10 AUG 2020

I MP OR TA NT R AT ING DEFINITIONS
BUY
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 12 months.

HOLD
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 in line or underperform in the market in the
next six to twelve months.

SELL
We dislike both the valuations and fundamentals of stocks with a SELL rating. We expect the share price to underperform in the next six to12 months.

I MP OR TA NT DISC L AIM ER
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 said information may
be incomplete or condensed. All opinions and estimates constitute the judgment of COL’s Equity Research Department as of the date of the report and are
subject to change without prior 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 and/or its employees not involved in the preparation of this report may have investments in securities of derivatives of the companies
mentioned in this report and may trade them in ways different from those discussed in this report.

C O L R E S EAR C H T EAM

APRIL LYNN TAN, CFA

VP & HEAD OF RESEARCH
april.tan@colfinancial.com

CHARLES WILLIAM ANG, CFA GEORGE CHING RICHARD LAÑEDA, CFA

DEPUTY HEAD OF RESEARCH SENIOR RESEARCH MANAGER SENIOR RESEARCH MANAGER
charles.ang@colfinancial.com george.ching@colfinancial.com richard.laneda@colfinancial.com

JOHN MARTIN LUCIANO, CFA FRANCES ROLFA NICOLAS JUSTIN RICHMOND CHENG
SENIOR RESEARCH ANALYST RESEARCH ANALYST RESEARCH ANALYST
john.luciano@colfinancial.com rolfa.nicolas@colfinancial.com justin.cheng@colfinancial.com

ADRIAN ALEXANDER YU KERWIN MALCOLM CHAN

RESEARCH ANALYST RESEARCH ANALYST
adrian.yu@colfinancial.com kerwin.chan@colfinancial.com

C O L F INANC IAL G R O UP, I NC.

2402-D EAST TOWER, PHILIPPINE STOCK EXCHANGE CENTRE,
EXCHANGE ROAD, ORTIGAS CENTER, PASIG CITY
PHILIPPINES 1605
TEL NO. +632 636-5411
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WEBSITE: www.colfinancial.com

COL Financial Group, Inc. 7