The adverse effects of coking coal prices and exchange rates dragged down performance; the company achieved revenue of HK$3.44 billion in the first half of this year, a year-on-year decline of 26%; net profit of HK$1.23 billion, a year-on-year decline of 23%. The decline in profits was mainly affected by the decline in coking coal prices and the depreciation of the RMB against the Hong Kong dollar. Benefiting from the company's production optimization, fine coking coal production increased sharply by 7% in the face of a slight decline in raw coal production. The average sales price in the first half of the year declined markedly along with the market, but the performance was superior to the market; production costs declined steadily. The company's overall gross profit fell 26% year over year, but gross margin increased slightly by 1 percentage point to 65%. The company declared a 1H23 interim dividend of HK$0.1 per share, with a corresponding dividend rate of 41%. The high percentage dividend continues. Although we believe that coking coal prices will be central in the short term or will continue to be under pressure in an environment where fundamentals are relaxed, and the company maintains a “buy” rating, considering the company's streamlined, efficient operation and stable operation of high-quality assets and continued high dividends, the target price is 3.3 HKD 3.3 (0.95x 23E BVPS is consistent with the company's historical PB average since 2007), and 23-25E EPS is 0.47/0.47/0.48 HKD.

Production optimization drives refined coal production to a record high

1H23's three high-quality mines, the Xingwu Coal Mine, the Jinjiazhuang Coal Mine, and the Zhaiyadi Coal Mine, produced a total of 2.66 million tons of raw coal, a slight decrease of 1.5% over the previous year; however, benefiting from increased recovery rates driven by optimization of production technology, fine coking coal production increased 6.9% year-on-year to 1.86 million tons. Despite the worsening impact of supply and demand in the coking coal market in the first half of this year, benefiting from a stable sales structure for large customers, the company achieved an average price drop of less than the market price for fine coking coal in the first half of the year, with a year-on-year decline of 22% to 1,973 yuan/ton. 1H23's production cost of raw coal per unit fell 4.3% year on year to 400 yuan/ton. The decline was mainly due to a decrease in resource taxes and fees levied on coal prices (-20 yuan/ton) and a decrease in raw material costs (-4 yuan/ton), but part of the decline was offset by loss of raw coal production. Refined coal processing costs fell 15% year on year to 40 yuan/ton due to increased production.

The price of coking coal is unlikely to rebound sharply at 2H23

Since 2023, four influencing factors have driven easing on the coking coal supply side: 1) Mongolian coking coal imports have increased dramatically after transportation has resumed; 2) the increase in imports brought by the transfer of Russian coal sales destinations to Asia to China; 3) Australian coal, as the main high-quality coking coal, increased imports after import liberalization have leveraged the supply of domestic coking coal; 4) the price of thermal coal has declined, and part of the coking coal that originally flowed to thermal coal will flow back into the supply of coking coal.

We expect this to increase domestic coking coal supply by about 35-40 million tons per year. Compared to the supply side, where growth is more obvious, the performance of downstream real estate is weak. It affects demand side growth through the transmission effect of the real estate chain. In the context of overall easing supply and demand, it may be difficult for coking coal prices to rebound sharply in the second half of the year.

Risk warning: Coal price performance fell short of expectations; project progress was slower than expected.