Short-term stock price suppression factors are being released; 2H23 may have potential for recovery
Coking coal prices have fallen sharply in the past two months under a pattern of strong supply and demand. Combined with the influence of multiple factors such as recent interest rate reduction and shareholders' holdings reduction, the company's stock price has been adjusted. According to information from the Stock Exchange, Fude Life Insurance Co., Ltd., the second largest shareholder of the company, has continued to reduce the company's holdings since May 2023, reducing its holdings by 357.64 million shares. The shareholding ratio dropped from 31.01% to 28.93%.
Driven by a sharp rise in coking coal prices in 2022, the company's performance reached a record high of HK$2.72 billion. However, the full year performance of 2023 may decline year-on-year due to falling coal prices, although 2H23 coking coal prices may have the potential to improve month-on-month. Following the continuation of the company's high dividend policy for many years, we think the company's current valuation is attractive. Maintaining the “buy” rating, the target price is HK$3.3 (0.94x 23E BVPS3.51 HKD, which is consistent with the company's historical PB average since 2007). 23-25E EPS is HK$0.47/0.47/0.48.
Production and operation are stable, and a high percentage of dividends has investment value
Shougang Resources owns a total of three production mines with streamlined, efficient assets and stable operation. In 2022, the company produced a total of 5.25 million tons of raw coking coal, with production reaching the approved annual production capacity. At the same time, under multi-channel geological efficiency enhancement, cost control results have been remarkable, and core costs have remained stable. The company has sufficient cash positions and stable business prospects, laying the foundation for maintaining a high level of dividends in the future. In 2022, the company declared a final dividend of HK$0.28 per share, an interim dividend of HK$0.15 per share, and a total annual dividend of HK$0.43 per share, accounting for 80% of the net profit attributable to the mother. It has maintained a high percentage dividend level of around 80% for six consecutive years, which also fully demonstrates the advantages of stable operation and abundant cash.
The fundamentals of coking coal were relaxed in 2023, and the price center fell back from a high level
We believe there will be some effective growth in the supply of coking coal in 2023, mainly due to: 1) the resumption of transportation in Mongolia and the eastward shift of Russian coal trade are expected to bring about 20 million tons of coking coal imports from Mongolia and Russia; 2) structural supplements of high-quality coking coal after Australian coal imports are liberalized; 3) some of the coking coal that flows to thermal coal will flow back to coking coal after domestic thermal coal prices fall back to coking coal. On the demand side, the resilience of infrastructure investment has formed a certain basic support for steel demand, but currently the real estate industry is in a stage of recovering confidence, and there is no momentum to drive further demand growth. Compared to the more certain growth on the supply side, the demand side is expected to remain stable, and the fundamentals of coking coal are relaxed throughout the year. However, the potential new round of economic support policies and possible moderate production cuts by coking coal cluster companies may support the coking coal price of 2H23 to a certain extent.
Risk warning: 1) the price of coking coal fell more than expected; 2) the dividend rate fell.