Increase in coal production & improve coal chemical profitability, focus on coal mine growth. Maintaining the “buy” rating company released a three-quarter report. The first three quarters of 2023 achieved operating income of 9.60 billion yuan, -16.1% year-on-year; realized net profit of 1.8 billion yuan, or -34.8%; of these, Q3 achieved operating income of 3.14 billion yuan, -9.17% month-on-month, and net profit of 440 million yuan, -25.8% month-on-month. The decline in the company's performance is mainly due to falling prices of major products such as coal and urea. We have appropriately lowered our 2023-2025 profit forecast. The estimated net profit for 2023-2025 is 22.2/24.6/27.2 (previous value 28.1/31.0/33.4) billion yuan (previous value: 28.1/31.0/33.4) billion yuan, or -31.3%/+10.7% year-on-year; EPS is 1.49/1.65/1.83 yuan, corresponding to the current stock price PE of 5.8/5.2/4.7 times. Considering that the company's current valuation is low and demand will improve due to future economic recovery, the company's coal production capacity is still increasing, and its performance has potential to grow, maintaining a “buy” rating.

Coal business: Volume price increases and decreases in the first three quarters, and new mining capacity gradually releases volume increases and price decreases in the first three quarters of 2023. In the first three quarters of 2023, the company achieved raw coal production/sales volume of 1000/8.98 million tons, +12.8%/+3.5% year-on-year, a tonne coal price of 750 yuan, -23.5% year-on-year, a tonne coal cost of 306 yuan, +3.7% year-on-year, and a gross profit of 444 yuan per ton of coal, -2.2%. Production and sales continued to grow in Q3 2023. Q3 The current raw coal production/sales volume is 355/3.31 million tons, +0.3%/+4.5% month-on-month, the price of tons of coal is 683 yuan, -1.9% month-on-month, the cost of tons of coal is 306 yuan/ton, -1.5% month-on-month, and the gross profit per ton of coal is 377 yuan, -2.2% month-on-month. The increase in production is mainly due to the increase in the capacity utilization rate of the Yuxi coal mine, and Tongbao Coal has also entered joint trial operation.

Coal chemical industry business: The downward cost pressure on coal prices is slowing down, urea profit improved month-on-month, and urea profit declined in the first three quarters. In the first three quarters, the company achieved urea production/sales volume of 75/740,000 tons, +7.2%/+6.5%, a comprehensive sales price of 2,249 yuan/ton, -9.4% year-on-year; a comprehensive cost of 1904 yuan/ton, -8.2% year-on-year; and a total gross profit of urea products of 250 million yuan, -9.7% year-on-year. The total gross profit of dimethyl ether/caprolactam was -195/-52.7 million yuan respectively, and production and marketing enthusiasm declined. Looking at a single quarter, urea profits increased, caprolactam reversed losses, and dimethyl ether production was almost stopped to reduce losses. In 2023, the comprehensive sales price/cost of urea in Q3 was 2178/1699 yuan/ton, +3.7%/-6.3% month-on-month, and the gross profit per ton was +7.3% month-on-month. Urea profit improved; caprolactam's gross profit margin was 3.9%, turning a loss into a profit; and dimethyl ether production and sales basically stopped.

The coal mine under construction is progressing steadily, and the company's production capacity is still growing

Coal mine growth: The company's Tongbao Coal Industry (900,000 tons/year) and Qinyu Coal Mine (900,000 tons/year) have entered joint trial operation. Two resource-integrated mines are under construction, with a total annual production capacity of 1.8 million tons. Among them, Baisheng Coal (900,000 tons/year) is expected to enter joint trial operation by the end of 2023, and the company's coal production capacity is still increasing. Jincheng's pollution prevention measures may affect enterprise production. According to the requirements of Jincheng City, it is estimated that the company's Q4 urea production will decrease by about 78,000 tons, and caprolactam production will decrease by about 13,500 tons, which will affect the company's revenue by about 320 million yuan.

Risk warning: coal prices fell beyond expectations; coal production fell short of expectations; and new production capacity fell short of expectations.