1H23 The performance was better than we expected
The company announced 1H23 results: revenue of HK$3,442 million, -26.2% year on year; net profit of HK$1,233 billion, year-on-year, corresponding to profit of HK$0.24 per share, which was better than our expectations. Mainly, the price drop of the company's coking coal sales was less than we expected, and the refined coal washing rate was higher than our expectations.
Comments: 1) Refined coal production has increased, and the washing rate has increased. 1H23 The production of raw coking coal/fine coking coal was -1.5%/+6.9% year-on-year to 266/186 million tons. Raw coking coal production completed 51% of the approved annual production capacity, 100% of raw coal was washed, and the refined coal washing out rate was +5.5ppt to 69.9% over the same period last year. The sales volume of fine coking coal was +2.9% year-on-year to 1.79 million tons. 2) The price of coal has declined. The average price of 1H23 fine coking coal was -22% or -548 yuan/ton to 1,973 yuan/ton (including tax in RMB), while the average price in the Liulin #4/#9 coking coal market during the same period was -29%/-33%. Thanks to the long-term price coordination mechanism, the decline in the company's sales price was less than the drop in market price. 3) By type, the company's No. 1 refined coal sales accounted for 3ppt to 24% year-on-year. 4) Reduced unit costs. The unit production cost of 1H23 original coking coal was -4.3% or -18 yuan/ton to 400 yuan/ton, of which the cash cost was -18 yuan/ton to 326 yuan/ton, mainly uncontrollable costs (resource tax calculated at ad valorem, etc.) -20 yuan/ton to 90 yuan/ton. After excluding this part of the cost, the cash cost was +2 yuan/ton to 236 yuan/ton over the same period last year. 5) With rising market interest rates, 1H23's interest income was +HK$37.124 million to HK$83.75 million year-on-year. 6) 1H23 Net operating cash inflow was +HK$841 million to HK$2,721 million year-on-year. As of 1H23, the company had about HK$9.416 billion in free capital at its disposal (excluding HK$1,415 million to pay dividends at the end of 2022, there is still about HK$8 billion in free capital). 7) 1H23's proposed interim dividend is HK10 cents (vs. 1H22 interim dividend of 15 HK cents), with a payout ratio of 41%, and an interim dividend rate of 4.42% corresponding to the current stock price.
Development trends
Coal production may decline in the second half of the year, and sales prices are still supported. In terms of volume, we expect the company's coal production may decline in the second half of the year as the Q4 Xingwu Coal Mine is replaced by the upper and lower groups of coal production. In terms of price, since July, Liulin 4#/9 #焦煤均价1944 /1,738 yuan/ton, down 7%/6% from 1H23. The drop is relatively small. The main thing is that molten iron production remains relatively high, and coke steel companies replenish stocks as needed. Looking ahead, we think it will still take time for downstream demand to improve, and the growth in demand for coking coal may be limited. However, high-quality supply is still tight. Production of fine coking coal in January-July was +0.5% year-on-year, reflecting the lack of flexibility in domestic supply. Only 1.19 million tons of Australian coking coal were imported during the same period (vs. 28.59 million tons in the same period in 2020). Furthermore, there is currently an inversion between the import cost of high-quality primary coking coal and domestic procurement costs. Therefore, we believe that the price of the company's high-quality primary coking coal is still supported.
Profit forecasting and valuation
Due to changes in price and other assumptions, we increased 2023/24e EPS 11%/14% to HK$0.38/0.37. The current stock price corresponds to 2023/24e 6.0x/6.1x P/E. Maintaining an outperforming industry rating, the target price was raised by 12.5% to HK$2.70, corresponding to 2023/24e 7.2x/7.3x P/E, with 19.5% upside compared to the current stock price.
risks
The recovery in downstream demand fell short of expectations; supply increased beyond expectations.