In a recent research report released on the 11th, the team led by Sara Chan at Morgan Stanley expressed optimism about the future of China's gold marketThey highlighted several favorable conditions, both globally and domestically, that are expected to benefit the Chinese gold industry significantly in the coming years.

As geopolitical tensions escalate, the report posited that Chinese gold will capitalize on the surge in market-mediated risk aversion, attracting the attention of investors who are increasingly turning to gold as a safe havenAdditionally, fluctuations in the Chinese yuan may further support higher gold prices, creating a favorable environment for investment.

The report notably brought attention to the three leading gold companies in China: Zijin Mining, Shandong Gold, and Zhaojin MiningMorgan Stanley believes these companies are currently undervalued in the market, projecting substantial increases in their gold production over the next five years

With their strong fundamentals and growth potential, these companies are positioned to take advantage of the favorable market landscape.

According to projections from Morgan Stanley's commodities team, gold prices may experience moderate increases in the short term, with expectations of reaching $2,850 per ounce by the second quarter of 2025. This forecast indicates a 5% rise compared to the current levels, which are nearing historical highs.

Focusing on the strengths of Chinese gold mining companies, the report outlines three major advantages: first, the uncertain global geopolitical context and a cyclical decline in interest rates position gold as the premier commodity, thereby providing opportunities for these companies; second, strong domestic demand from Chinese investors for gold remains robust; and third, amidst predictions of fluctuations in the yuan, there is an expectation for gold prices to experience further gains.

Moreover, Morgan Stanley anticipates significant production growth for Zijin Mining, Shandong Gold, and Zhaojin Mining, with impressive compound annual growth rates (CAGR) projected at 20.8%, 12.4%, and 8.2%, respectively

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Most notably, Zijin’s marine project, expected to commence operations by the end of 2025, is projected to boost its gold output from 17.7 tons in 2023 to an impressive 35.2 tons.

As gold prices are expected to rise, the report predicts a substantial increase in the profits of Chinese gold mining companiesFor instance, a 1% increase in gold prices could potentially uplift net profits for Zhaojin, Shandong Gold, and Zijin between 0.7% and 2.8%.

Despite a decline in gold jewelry consumption during the first half of this year, investor enthusiasm has surgedAccording to Morgan Stanley’s data, gold purchases increased by 46% year-on-year in the first half, primarily driven by strong investment demandThis year, it is estimated that investment demand will contribute more than 40% to total gold consumption, significantly higher than levels observed last year.

So why is China becoming a focal point in the gold market? Morgan Stanley suggests that the most compelling alpha opportunities lie within Chinese gold companies compared to their global counterparts, attributed to three key reasons:

First and foremost is the robust domestic demand

Morgan Stanley observes that Chinese investors continue to exhibit ascending enthusiasm for gold, providing a stable market foundation for local gold producersIn contrast, while global gold ETFs have cooled off, demand for onshore gold ETFs in China remains unabatedThe first half of 2024 is projected to witness a skyrocketing demand for gold bars, capturing half of the total gold demand in ChinaAdditionally, the People's Bank of China's gold purchases continue to bolster market demand.

The second reason is the leading production growth among Chinese gold minersOver the last decade, these miners have become increasingly active in the acquisition market, driven primarily by a strong national need to secure gold reservesCompanies like the ‘Big Three’ in Chinese gold mining are actively exploring new mineral projects overseas, particularly in Africa.

Lastly, the report highlights the enhanced profitability elasticity of Chinese gold

Morgan Stanley forecasts that under expectations of yuan fluctuations, the price of gold priced in RMB is projected to rise by 14% year-on-year, potentially reaching a historic high of 652 RMB per gram by 2025.

Despite the considerable growth potential of Chinese mining companies that may be overlooked by the market, the report emphasizes that Chinese gold stocks have only seen price increases between 7-28% over the past year, which lags behind global gold peers that enjoyed gains between 8-49%. Morgan Stanley underscores the influence of global geopolitical tensions and record-high gold prices that have sparked concerns regarding the execution capabilities of Chinese companies in international projects.

Nevertheless, Morgan Stanley cautions investors about possible risks, including delays in interest rate cuts, complications in cash flow realization, and a shift in market sentiment towards risk appetite, which could potentially lead to profit reversals