The net profit of Yankuang's original assets dropped 8% QoQ to RMB4,215m in 3Q23 under CAS, 9% below our forecast. The profit of the new assets acquired from parent also dropped 45% YoY on an annualised basis. We expect its earnings to fall 21% QoQ mainly on lower coal prices. We reiterate our HOLD calls on the company as we expect significant earnings declines in the next two years even with the contributions from new assets.
Key Factors for Rating
Yankuang's net profit fell 52% YoY to RMB4,516m in 3Q23 under CAS. After removing the contributions from newly acquired assets from parent, the earnings of its original assets dropped 54% YoY and 8% QoQ to RMB4,215m, 9% below our forecast. The discrepancy mainly came from the lower-than- expected sales volume and ASPs of most of its mines. In particular, the ramp- up at two mines in Inner Mongolia was deterred by stringent safety control.
The company completed the acquisition of 51% stakes in Luxi Mining and Xinjiang Nenghua by the end of September 2023 from its parent. The total net profit of these two acquired assets was RMB2.16bn in 9M23. After we annualise it, its earnings plummeted 45% YoY, mainly on lower coal prices. It also fell short of the guaranteed profit (RMB15.4bn in 2023-25) on a pro-rata basis.
Looking ahead, we expect its net profit to drop 21% QoQ in 4Q23 even if we include the contributions from the acquired assets for the quarter. It is mainly because of lower expected coal prices.
We adjust our earnings forecasts by +3.7%/-1.5%--0.1% for 2023/24/25 respectively after updating our model with the results and fine-tunings. Although the company's H shares offer about 11% dividend yield for 2023E at current price, we do not think it is attractive enough as we expect the yield to drop significantly over the next two years with its earnings.
Key Risks for Rating
Higher-than-expected realized coal price.
Lower-than-expected cost.
Valuation
We marginally raise our target price for its H shares from HK$12.21 to HK$12.22 to reflect the changes in our earnings forecasts. Our target valuation remains 0.92x 2023E P/B.
We reduce our target price for its A shares from RMB18.43 to RMB17.76. We still set our target price based on its average 3-month A-H premium which has narrowed from 62% to 55% since early September.