After going through the trough, the performance improved significantly. In the first half of 2017, the company's operating income was 2.913 billion yuan, down 40% from the same period last year, mainly due to a decrease in income from the material circulation business this year compared with the same period last year; a net profit of 529 million yuan and EPS0.4 yuan, achieving a turnaround, and the most important factor for improving performance was a sharp rebound in coal prices. The net profit in the second quarter was 178 million yuan (- 22% compared with the previous quarter), mainly due to rising costs and a slight drop in coal prices. In the first half of 2017, the company's sales / management / financial expense rates were 1.28%, 7.17% and 3.69%, respectively, with year-on-year changes + 0.44/+3.30/+0.83pcts.
Output dropped slightly in the first half of the year, the average price increased by more than 80% over the same period last year, and the company's output may shrink to about 8 million tons in the next three years. In the first half of 2017, the company achieved raw coal output of 4.98 million tons (- 3.9% compared with the same period last year). At present, the company has 7 pairs of production mines, with an approved annual production capacity of 10.75 million tons, rights and interests capacity of 9.06 million tons, accounting for 83% of the total. The promotion of supply-side reform will have an impact on the company's long-term production capacity. Micun Coal Mine (1.9 million tons / year) and Teaching No.2 Coal Mine (450,000 tons / year) are scheduled to be closed this year, and Lugou Coal Mine (600,000 tons / year) is also scheduled to be closed in 2018. After withdrawal, the company's production capacity will drop to 8.4 million / 7.8 million tons in 2017 and 2018. The company's production is expected to remain at about 10 million tons this year and drop to about 8.5 million tons in 2018. The average sales price of the company in the first half of the year is 431 yuan / ton (year-on-year + 81%), the Q1/Q2 coal price per quarter is 453amp 408 yuan / ton, and the cost of coal sales per ton is 214,226yuan / tonne respectively. The falling cost of the price has led to a decline in the second quarter's quarter-on-quarter performance, and we expect that the company's profit per ton of coal will still have room for improvement with the rebound of coal prices in the second half of the year. The company's annual output may fall by 5%, but prices are expected to increase by 40% to 45%, supported by a strong rebound in profits.
The power generation is stable, and the acquisition of railway assets strengthens the coordination of the industrial chain. In the first half of 2017, the company generated 158 million kilowatt-hours of electricity, the same as the same period last year. At present, the company's power business is mainly responsible for Dongfeng Power Plant, which is a self-provided power plant, with an annual generating capacity of about 400 million kilowatt hours, providing a stable and reliable power supply for the company. The company recently announced that it intends to acquire railway assets related to the controlling shareholder, totaling 589 million yuan. At present, a railway line owned by the company's Zhengxin Railway can only ensure the outward transportation of coal from a pair of mines in Zhaojiazhai, while the rest of the mines rely on the railway transportation office of Zhengzhou Coal Group. It is expected that after the completion of the acquisition, the company's railway transport system will be further improved, improve operational efficiency, reduce related transactions with controlling shareholders, and strengthen the coordination of the industrial chain.
Risk factors: fluctuations in macroeconomic growth, affecting coal demand. Supply policy continues to relax, suppressing the rise in coal prices.
Profit forecast, valuation and investment rating. Considering that coal prices can remain high in the next few years, and the company's profits will pick up from the trough, we give the company a forecast of 0.79, 0.90, 1.01 yuan for EPS in 2017-2019, and the current price is 6.22 yuan, corresponding to the 2017-19 P/E8/7/6x. The target price is 7.9 yuan, corresponding to the 2017 P/E10x, with a medium-term "buy" rating for the first time.
