Jiutai Bangda Energy is a coal mining company located in Guizhou Province. The company adopts mechanized longwall backward mining technology to mine two underground coal mines, namely Hongguo Coal Mine and Baogushan Coal Mine. The raw coal is mined and then washed in the coal washing yard to become clean coal (mainly composed of 1 / 3 type coking coal) and by-product coal and peat, which are finally sold to coking enterprises and steel or chemical manufacturers. Coking enterprises further use coking coal to produce coke, and eventually coke can be used to produce iron and steel. The mining licenses of the two mines owned by the company are both valid for 2028. The company produced a total of 1.1 million tons of coal in 2019.

After our research, we believe that the company's revenue in 2020 will be under great pressure for two main reasons: first, the price of coking coal has fallen by 21% since the beginning of this year, and the company's operating income and profit margins are closely linked to coke prices. the decline in coking coal prices will have a negative impact on the company's profits; second, the company completed the acquisition of Xiejiahegou Coal Mine in January this year, with a consideration of 1.1 billion yuan. We believe that this acquisition will bring considerable amortization of goodwill in the next few years, thereby reducing the company's profit margins. In addition, the research also shows that the company's purchase price for Xiejiahegou coal mine is too high, it may be difficult for the company to profit from the acquisition.

Given the weakness of the coking coal market and the goodwill amortization of the Xiejiahegou acquisition, we expect the company's net profit to fall by 2 per cent in 2020 and 17 per cent in 2021. Based on the company's current share price of HK $3.56 per share, the company currently trades at 23.9 times static earnings. We believe the valuation is ridiculously high, far exceeding the static price-to-earnings ratio of Shougang Fushan Resources (Bloomberg Code: 639 HK).

For the first time, it covers the rating of "sell", with a target price of HK $1.75 per share. The target price corresponds to 11.8 times static P / E. We think the company's share price may have 51% downside.