Nuclear increases and acquisitions go hand in hand, and the flexibility of coal production capacity is remarkable. The company owns three major coal mines, Gaojialiang, Hongqingliang, and Hongdunzi. Among them, the Gaojialiang Coal Mine passed two nuclear increases in 2019 and 2022, increasing production capacity by 2 million tons; the Hongdunzi Coal Mine completed the acquisition in 2019, and the Hongyi Coal Mine and Hong2 Coal Mine were put into operation at the end of September 2022 and the beginning of December 2023, respectively. By the end of 2023, the company had an approved coal production capacity of 19.3 million tons and an equity production capacity of 13.28 million tons. In 2024, the Hong'er Coal Mine is expected to contribute 1.3 million tons of equity production to an increase of 11%.

Production in the Hongdunzi coal mine switched to coking coal, and high premiums contributed to increased profits. As of 2023, the company's gross profit per ton of coal was 261.6 yuan/ton. Meanwhile, the newly put into operation at the Hongdunzi No. 1 and No. 2 mines in Ningxia are all coking coal mines. As mining continues to advance, they will gradually change from surface thermal coal seams to coking coal seams. High premiums brought about by improved coal quality are expected to further release profit increases in the future.

Cost control is at the leading level in the industry, and full production at Hongyi and Hong2 coal mines is expected to dilute costs. The company's overall cost of selling tons of coal is lower than the industry average. Compared with other companies in the same industry, such as Dayou Energy, China Coal Energy, and Jinkong Coal, the company's coal has a cost advantage of 50-144 yuan/ton, and in the future, with the full production of the newly built Hongyi and Hong2 coal mines, it is expected that the cost will be further diluted, and the low cost advantage of the coal business is prominent.

Short-term debt repayment pressure is light, and the cash flow on the account is abundant and stable. As of the end of September 23, the company's total interest-bearing debt was 8.482 billion yuan, of which short-term liabilities were only 880 million yuan, while net operating cash for the first three quarters of 23 was 3,061 billion yuan, so the pressure on short-term debt repayment was low. Furthermore, the Hongdunzi coal mine has already been put into operation, and the company has no short-term construction projects or large-scale capital expenditure requirements. As of the third quarter of '23, the parent company had a monetary capital of 3,039 billion yuan, and the cash flow on the account was abundant and stable.

The State Assets Administration Commission proposed two “market value management assessments”. As the target of the reform of high-cash and low-debt state-owned enterprises, dividend expectations are expected to increase dramatically. The State Assets Administration Commission proposed the “Market Value Management Assessment” on January 24. This will guide central enterprise leaders to pay more attention to the market performance of listed companies they control, and is expected to encourage enterprises to return to investors through repurchases, dividends, etc. However, in the coal sector, the number of central enterprises is relatively small, and the positive impact of market value management assessments will directly spill over to provincial and municipal state-owned enterprises represented by Haohua Energy. As of February 19, 24, the company's PB (LF) was only 0.93 and in a broken state (as of the third quarter of 2023, the company's net assets were 7.82 yuan per share, and the stock price was 7.25 yuan on February 19, 24), which is expected to benefit significantly.

Profit forecast and investment rating: The company's share of coal sales is as high as 80%, there is little fluctuation in coal sales prices, and the company's performance support is strong; in addition, the company has little short-term debt repayment pressure, no short-term construction projects, no large-scale capital expenditure requirements, and abundant cash flow. In the context of market value management assessments, dividend expectations have increased dramatically, and the company's value is expected to be re-valued. We evaluate the company's value from two perspectives: From the perspective of the PE valuation method, we expect the company to achieve net profit of 13.54/15.11/1,545 billion yuan in 23-25 years, respectively, corresponding to 7.71/6.91/6.76 times PE. We selected five thermal coal companies, including China Shenhua, as comparable companies for comparative analysis. The average PE of comparable companies in 23-25 was 9.60/8.98/8.64 times, and the company's PE discount margin was 25%/30%/28%, respectively. From a dividend rate perspective, based on the above forecast, assuming that the company's dividend rate in '23 was 50%/60%/70%, respectively, the cash dividend would be 6.77/8.12/948 million yuan. Under a neutral assumption, we expect the company's dividend rate to increase to 60%. Based on the stock price on February 19, '23, the dividend rate is 7.78%. In the future low interest rate market environment, we expect the company's dividend ratio to return to around 5.5% in '22, so there may be room for the company's stock price to rise by nearly 41%. In summary, considering that the company has both stable growth and the safe-haven attributes granted by dividend increases, we have covered the “buy” rating for the first time.

Risk warning: The growth rate of the domestic economy has declined sharply, downstream demand for coal falls short of expectations, and production safety accidents have caused coal production to fall short of expectations.