The acquisition of shares in Yunnan Shenhuo boosted performance, and is optimistic about the increase in coal and aluminum. The company that maintained the “purchase” rating released its 2023 annual report. In 2023, the company achieved operating income of 37.63 billion yuan, -11.9%; realized net profit of 5.91 billion yuan, or -22.1% year on year; of these, Q4 achieved operating income of 8.996 billion yuan, -5.5% month on month; and realized net profit of 1.80 billion yuan, +32.3% month on month. Consider the decline in market coal prices in the first quarter of 2024. We lowered our 2024-2025 profit forecast and added the 2026 profit forecast. We expect net profit of RMB 62.8/69.1/7.42 billion yuan (the value before 2024-2025 was 68.9/7.26 billion yuan), +6.3%/+10.0%/+7.5% year-on-year; EPS is 2.79/3.07/3.30 yuan, corresponding to the current stock price PE of 7.2/6.5/6.1 times. Considering that technical reforms in the Liangbei coal mine are expected to contribute to the increase, the release of battery aluminum foil is imminent, and the company's high profit is expected to continue. Maintain a “buy” rating.
Coal production and sales are rising steadily, and the profit of electrolytic aluminum is expected to improve
Coal business: The company's main types of coal are anthracite and lean coal, and the downstream is mainly in the metallurgical industry. Benefiting from the release of Liangbei coal mine production, the company's coal production and sales increased steadily. In 2023, the company's coal production and sales volume was 717.1/7248 million tons, +5.3%/+7.4% year over year, of which anthracite sales volume was 292.9/2.986 million tons, -9.5%/-7.2% YoY, and 424.1/426.1 million tons of poor coal and lean coal production and sales, +18.6%/+20.8% YoY. In terms of price, the average price of smokeless coal in Yongcheng in 2023 was 1,687 yuan/ton, -19.4% year on year; Henan poor coal truck plate price was 812 yuan/ton, -18.7% year on year. Under price pressure, the gross margin of the company's coal business fell to 42.4% from 52.8% in 2022. Electrolytic aluminum business: Yunnan's electrolytic aluminum production limit gradually affected the release of Yunnan Shenhuo's production. In 2023, the company's electrolytic aluminum production and sales volume was 151.8/1,527,000 tons, -7.2%/-6.1% compared with the same period last year. In terms of price, the average price of A00 aluminum in 2023 was 18,694 yuan/ton, -6.4%; in 2023, the gross margin of the company's electrolytic aluminum business fell to 23.9% from 26.7% in 2022. As of March 25, 2024, the average price of aluminum was 1,9021 yuan/ton, compared with +1.8% for the whole year of 2023, which is beneficial to the company's electrolytic aluminum profit improvement.
The contribution of the Liangbei Coal Mine increased, and the acquisition of part of Yunnan Shenhuo's shares increased equity production capacity in the coal business: With the gradual release of production from the Liangbei Coal Mine, it is expected to continue to contribute in 2024. Electrolytic aluminum business: In August 2023, the company announced that it plans to acquire 9.90% and 4.95% of Yunnan Shenhuo shares held by Henan Asset Commercial Shenhuo Green Development Fund and Shangqiu Xinfa Investment Co., Ltd. The purchase price was 966 million yuan and 483 million yuan. By the end of the third quarter, the company had completed the registration procedures for the relevant industrial and commercial changes. The company's shares in Yunnan Shenhuo had increased from 43.40% to 58.25%, and the production capacity of electrolytic aluminum was further increased. The net profit of 2023Q4 Company was 1.94 billion yuan (1.76 billion yuan in Q3), while minority shareholders Profit and loss was only 140 million yuan (390 million yuan in Q3), and the reduction in minority shareholders' equity was mainly due to changes in Yunnan Shenhuo's equity. Aluminum foil business: In June 2023, a board resolution was held to split and list the holding subsidiary Shenlong Baoding New Materials Company. In November 2023, Shanghai Shenhuo Aluminum Foil Co., Ltd., a wholly-owned subsidiary of Shenlong Baoding, successfully acquired 51% of Shangqiu Sunshine Aluminum's shares held by Shangqiu Xinfa Investment Co., Ltd. On the business side, Shenlong Baoding has completed the IATF16949 automotive quality management system certification. Furthermore, on January 11, 2023, the company decided to build an aluminum foil project with an annual output of 110,000 tons of new energy batteries in Yunnan. After delivery, the company will develop 250,000 tons of aluminum processing capacity.
Risk warning: The decline in coal and aluminum prices exceeded expectations; the scale and timing of production stoppages and production cuts exceeded expectations; the release of new production capacity fell short of expectations.