Key points of investment
The company reversed its losses as scheduled. In 2017, the company's revenue was 5.712 billion yuan, a year-on-year decrease of 39.83%, mainly a year-on-year decrease of 76.64% in the material distribution sector; however, the company's coal business costs only increased 5.23% year on year. Cost increases were limited, and the improvement in profitability was still obvious. The company's net profit was 627 million yuan and EPS was 0.62 yuan. The year-on-year loss was reversed. The main factor behind the reversal and improvement in performance was the sharp recovery in coal prices. The company's net profit level is basically in line with the performance forecast, but it is lower than our expectations. The main reason is that the company's Q4 quarterly profit declined sharply from month to month. Since the cumulative profit that can be distributed to shareholders in 2017 was -132 million yuan, the company does not plan to distribute profits.
Production declined in 2017, the average price increased by more than 40% year on year, and the gross profit per ton of coal was about 209 yuan. In 2017, the company produced 9.21 million tons of raw coal (-11.53% year on year) and sold 9.32 million tons of commercial coal (-11.57% year on year). The company currently has 6 pairs of production mines with an approved annual production capacity of 9.2 million tons (production capacity was reduced by 1.9 million tons due to the exit from the Mimura coal mine in November 2017). The advancement of supply-side reforms will have an impact on the company's long-term production capacity, and the second teaching mine (450,000 tons/year) is also scheduled to close in 2018. After the exit, the company's production capacity will drop to 8.15 million tons in 2018. The company's average sales price in 2017 was 427.12 yuan/ton (+41.86% year on year), sales cost per ton of coal was 218.06 yuan/ton (+19.01% year on year), and gross profit per ton of coal was about 209 yuan. In 2018, the company plans to produce 8.2 million tons of raw coal, a significant drop from 2017. It is estimated that the total revenue is 3.8 billion yuan, mainly affected by the closure of the second teaching mine.
The power and railway sectors have developed collaboratively with the coal industry, and the Group's asset injection promises have not yet been fulfilled.
In 2017, the company generated 300 million kilowatt-hours of electricity, an increase of 7.91% over the previous year. Currently, the power sector of the company is mainly the Dongfeng Power Plant, which is a self-owned power plant with an annual power generation capacity of about 400 million kilowatt-hours, providing a stable and reliable power supply within the company. The company acquired railway assets related to the controlling shareholder in 2017. The completion of this acquisition further improved the company's railway transportation system, improved operational efficiency, reduced related transactions with controlling shareholders, and strengthened collaboration in the industrial chain. Zheng Mei Group promised to “achieve the overall listing of Zheng Mei Group's main coal assets by December 31, 2018, and completely eliminate competition in the industry.” Currently, the group is producing 4 mines, with an output of roughly 3 million tons. If the group fulfills its promises and the coal mine as a whole is injected into the listed company, the company's growth potential will be further opened.
Risk factors: Macroeconomic growth fluctuates, affecting coal demand. Supply policies continue to be relaxed, suppressing the rise in coal prices.
Profit forecasts, valuations, and investment ratings. Considering the company's withdrawal of production capacity in 2018, production will drop significantly, and unit cost pressure will increase accordingly. The company's 2018-2019 profit forecast EPS was lowered slightly to 0.52/0.58 yuan (the original forecast for 2018/19 was 0.79/0.90 yuan), and the 2020 profit forecast was given EPS 0.62 yuan. The current stock price is 5.39 yuan, corresponding to the 2018-20 P/E10/9/9x. The target price was 6.24 yuan, corresponding to the 2018 P/E12x. Since the company's performance will fluctuate to a certain extent in the next few years, we will downgrade the company to the “increase in holdings” rating.
