Steady management and strong cost control, high dividends highlight allocation value
Shougang Resources' revenue for the full year of 2023 fell 28% year on year to HK$5.89 billion, and net profit to mother fell 30% year on year to HK$1.89 billion. The decline in performance was mainly affected by the decline in coking coal prices during the year. The company achieved steady production of 5.25 million tons of raw coking coal throughout the year, and production and operation remained stable; at the same time, cost control was effective, and raw coal cash production costs/refined coking coal processing costs decreased by 5%/6% year-on-year. The company continued its high-dividend policy for many years. The dividend for the full year of 2023 was 28 HK cents per share, with a dividend ratio of 75%, corresponding to a dividend rate of 10.4%. The company's coal conversion work at the Xingwu Coal Mine may have had some impact on 1Q24 production. The 24-year production forecast was slightly lowered, and the net profit for 24-26E was adjusted to HK$19.8/21.3/2.21 billion (previous value: 23.9/24.3 billion yuan). Although coking coal prices may face some pressure in an environment where downstream demand is weak in the short term, the supply-side will still be a strong support for coking coal prices during the year due to reduced production in major production areas. In view of the efficient operation of the company's streamlined high-quality assets and continued high percentage dividends, the target price is HK$3.3 (0.95x 24E BVPS, which is consistent with the company's historical PB average since 2007).
Strict cost control in response to falling prices. In-transit sales affected profits. The company's raw coal production in 2023 remained flat at 5.25 million tons year on year, and refined coking coal production increased slightly by 1% year on year to 3.25 million tons. However, coal sales in transit at the end of '23 have yet to be settled, and sales volume fell 7% year over year to 3.1 million tons.
In terms of cost, the company continued to deepen cost reduction and efficiency. Material costs and maintenance costs declined year-on-year, and the annual cash production cost per unit of raw coal decreased by 5% to 216 yuan/ton; however, due to the year-on-year increase of 34 yuan in one-time depreciation and amortization of the project, the total production cost of raw coal fell slightly by 0.7% to 401 yuan/ton over the same period last year. Overall coal prices declined in 2023, and the average sales price of the company's coking coal fell 470 yuan (20%) year on year to 1,932 yuan/ton. Affected by falling coking coal prices and unconfirmed sales, the company's gross profit fell 34% year on year to 3.47 billion yuan, and gross margin fell 5.6 percentage points year on year to 58.8% year on year.
Safety inspections in major production areas have strengthened support prices. Short-term demand is still under pressure, and downstream demand for coking coal remains weak. Losses in the coking and steel industry continue to deepen, and the seventh round of coke decline has landed, and market sentiment is quite pessimistic. Currently, the average daily iron and water production is still at a low level of 2.21 million tons during the same period, and there are no obvious signs of improvement. We expect that negative feedback from the industrial chain caused by weak demand for steel will still suppress coking coal prices in the short term. The recovery in prices will still have to wait for clear signs of significant and continuous recovery in demand and industrial profits. However, in the medium to long term, the coking coal price center will be supported by marginal supply-side tightening. In addition to the effects of the depletion of the resources of coking coal itself, production growth in the province was limited in 2024 as the safety supervision of coal mines in Shanxi, a major coking coal province, was limited, further limiting the growth of coking coal production across the country on the basis that existing production is difficult to expand.
Risk warning: Downstream demand recovery fell short of expectations; supply release exceeded expectations.