Event: On October 27, 2023, the Company released its third quarter report for 2023. In the first three quarters of 2023, the Company realized operating income of CNY 9.604 billion, with a year-on-year decline of 16.08%; net profit attributable to parent was CNY 1.799 billion, with a year-on-year decline of 34.79%; net profit deducted from non-parent was CNY 1.776 billion, with a year-on-year decline of 44.55%.

23Q3 income tax month-on-month increase, the company's net profit attributable to the mother month-on-month decline. 23Q3, the company realized operating income of RMB 3.135 billion yuan, down 17.18% year-on-year and 9.17% month-on-month; realized net profit of RMB 437 million yuan, down 43.43% year-on-year and 25.82% month-on-month; realized net profit of RMB 439 million yuan deducted from non-parent, down 53.08% year-on-year and 21.91% month-on-month. The total profit of the company in 23Q3 was 846 million yuan, with a month-on-month growth of 2.83%; while the income tax reached 340 million yuan, with a month-on-month growth of 87.81%, resulting in a significant increase in income tax month-on-month, resulting in a month-on-month decline in net profit attributable to the parent company. According to the calculation of the statement, the income tax rate of the company in 23Q3 was 40.16%.

23Q3 coal sales volume month-on-month growth, price cost month-on-month decline. 23Q3, the company's coal output completed 3,550,400 tons, a year-on-year growth of 25.07%, a slight increase of 0.32% month-on-month; sales volume reached 3,313,300 tons, a year-on-year growth of 7.79%, a month-on-month growth of 4.50%. 23Q3, the comprehensive selling price of coal of the company was 683.04 yuan/ton, down-22.13% year-on-year and-1.90% month-on-month; the unit cost was 306.48 yuan/ton, up 2.70% year-on-year and-1.48% month-on-month; the unit gross profit margin was 55.13%, down-10.85pct year-on-year and-0.19pct month-on-month.

A number of coal mines under construction contributed to production increment in Q3, and Q4 production is expected to be further released. The production capacity of Tongbao Coal Mine of the Company is 900,000 tons/year, which has been completed and accepted in August 2023 and officially converted into production mine; the production capacity of Qinyu Mine is 900,000 tons/year, which has entered into joint trial operation in July 2023. The output of the two mines may further increase during Q4, contributing increment to the Company. In addition, the company expects that 900,000 tons/year Parkson Mine will enter joint commissioning by the end of 2023 and is expected to increase further next year.

23Q3 urea prices are driven by demand month-on-month warming, Q4 production and sales are expected to decline month-on-month due to the impact of shutdown and emission reduction. 23Q3, urea production completed 260,000 tons, a year-on-year increase of 3.63%, a month-on-month decrease of 3.81%, sales volume achieved 242,300 tons, a year-on-year decrease of 1.18%, a month-on-month decrease of 15.46%. 23Q3, the unit price of urea products of the company was 2178.46 yuan/ton, down-2.09% year-on-year and up 3.68% month-on-month; the unit cost was 1699.05 yuan/ton, down-17.84% year-on-year and-6.29% month-on-month; the unit gross profit margin was 22.01%, up 14.95pct year-on-year and 8.30pct month-on-month. According to the requirements of Notice on Clarifying Differentiated Emergency Control Measures for Enterprises in Key Industries in Autumn and Winter 2023-2024 issued by Jincheng City Leading Group for Air Pollution Prevention and Control, the company will implement differentiated control and take turns to stop production and reduce emission requirements in Q4. The company expects that urea output will decrease by about 78,000 tons and caprolactam output by about 13,500 tons in 23Q4, affecting the sales revenue of the company in the fourth quarter of 2023 to decrease by about 320 million yuan; 24Q1 urea output is expected to decrease by about 63,500 tons, affecting the company's 24Q1 sales revenue by about 140 million yuan.

Investment suggestion: With the gradual production of mines under construction, the company is expected to benefit from the continuous volume of coal. We predict that the net profit of the company from 2023 to 2025 will be 22.08/26.07/28.95 billion yuan respectively, corresponding to EPS of 1.49/1.76/1.95 yuan/share respectively, and PE corresponding to the closing price on October 27 will be 6/5/5 times respectively, maintaining the "recommended" rating.

Risk warning: coal and urea prices dropped sharply, and the mine under construction was put into operation less than expected.