Incident: On March 29, 2024, Shanmei International released its annual report. In 2023, the company achieved operating income of 37.371 billion yuan, a year-on-year decrease of 19.45%, and realized net profit of 4.260 billion yuan, a year-on-year decrease of 38.53%; net profit after deduction was 4.409 billion yuan, a year-on-year decrease of 38.23%. Net cash flow from operating activities was 5.985 billion yuan, down 58.07% year on year; basic earnings per share were 2.15 yuan/share, down 38.57% year on year. The balance ratio was 49.45%, down 9.21pct year over year.

In the fourth quarter of 2023, the company's revenue for a single quarter was 8.472 billion yuan, up 3.03% from the previous quarter; net profit for the single quarter was 264 million yuan, down 71.2% from the previous quarter; net profit after deduction for the single quarter was 337 million yuan, down 64.05% from the previous quarter.

Comment:

Coal sales prices fluctuated less, and rising costs caused profits to suffer. In 2023, the company achieved raw coal production of 38.9837 million tons, a year-on-year decrease of 4%; the total revenue from the company's coal business was 23.798 billion yuan, a year-on-year decrease of 13%. The company sold 34.8599 million tons of commercial coal, a year-on-year decrease of 6%.

Benefiting from the company's high proportion of long-term cooperation, the average sales price of the company's commercial coal was 682.66 yuan/ton, a year-on-year decrease of 7%. By type of coal, the average annual price of the company's thermal coal in 2023 was 507.96 yuan/ton, down 10% from 565.74 yuan/ton in the same period last year, and the cost increased 29% to 190.86 yuan/ton; in terms of metallurgical coal, the average value of the company in 2023 was 1248.07 yuan/ton, up 10% from 1136.40 yuan/ton in the same period last year, and the cost of tons of coal increased significantly, from 305 yuan/ton in 2022 to 572.25 yuan/ton in 2023, with sales falling 26% to 26% year-on-year 8.228,800 tons. The sharp increase in apparent costs in the company's self-produced coal sector may be due to adjustments in the company's accounting caliber to a certain extent. For example, the company may recalculate some of the costs of coal trade, such as Hong Kong miscellaneous fees and railway shipping costs, into the coal cost, so that the cost of coal production rose significantly over the same period last year. On the other hand, the cost of the company's metallurgical coal sector rose sharply in 2023. Prices rose regularly year-on-year in the metallurgical coal market throughout the year, while sales volume declined year-on-year. We think it may be because under the guidance of the company's coal refining strategy, mixed coal products from the original metallurgical coal sector were included in the thermal coal sector's statistical caliber, which led to significant changes in the company's metallurgical coal sector business data.

Strengthen the construction of advanced production capacity and resource continuity. In 2023, the company strengthened advanced production capacity construction, optimized production organization, and launched mining bridging efforts. Xinshun Coal and Zhuangzihe Coal Industries achieved completion and commissioning. It should be noted that the company set a target of not less than 33 million tons of self-produced coal production in 2024, which is a significant decrease from 2023. We expect that the company may continue to advance the procedures for increasing production capacity at the Hequ Open Pit Coal Mine. On the other hand, the company will also continue to strengthen resource continuity and make certain preparations to obtain reserve coal resources.

The gross margin of coal trade increased slightly. In 2023, the company sold 17.6454 million tons of coal, an increase of 4.29% over the previous year, including 9.2875 million tons of imported coal. In 2023, the company's revenue from the coal trading sector declined as coal prices fell, but benefiting from further improvements in overall business quality, the comprehensive gross margin of the coal trading business increased by 0.51 pct to 4.34% year on year. Overall, the company's coal trading business is in a relatively stable state.

Related expenses were paid in the fourth quarter, which greatly affected the company's profit in a single quarter. In the fourth quarter of 2023, the company's revenue for a single quarter was 8.472 billion yuan, up 3.03% from the previous quarter; net profit returned to mother for the single quarter was 264 million yuan, down 71.2% from the previous quarter. In terms of operating income, the company's production and operation process in the fourth quarter changed less than in the third quarter. We believe that part of the reason for the decline in the company's profit may have been the payment of related expenses in the fourth quarter, such as paying for the previous year's employee performance, rental and renovation expenses after office space changes, and some expenses such as deduction and impairment in the fourth quarter.

The company's dividend rate was reduced to 30% in 2023, and the 2024-2026 dividend promise was no less than 60%. In 2023, the company plans to distribute a cash dividend of 0.65 yuan (tax included) per share, totaling 1,289 million yuan (tax included), accounting for 30.25% of net profit due to mother in 2023. Based on the stock price on March 29, 2024, the company's dividend ratio is 3.79%. According to the “2024-2026 Shareholder Return Plan” issued by the company in 2023, profits distributed in cash for each year during the planning period are not less than 60% of the distributable profits achieved in that year.

Profit forecast and rating: Looking back at the 2023 coal market, we believe that coal price adjustments are a normal phenomenon of market fluctuations. Coal demand still has strong support for Changxie prices, and market prices have no conditions for a unilateral decline. The high proportion of long-term cooperation characteristics of the company's thermal coal business brings steady upward expectations, and the metallurgical coal business may benefit from economic recovery and increase demand to usher in profit recovery. The company's performance is expected to increase steadily, and the future is expected to be accompanied by an increase in sector valuation and a recovery in the company's valuation. We expect the company's 2024-2026 net profit to be 3,982 billion, 4.127 billion, 4.320 billion, and EPS 2.01/2.08/2.18 yuan/share, respectively; we are optimistic about the company's investment value and maintain the company's “buy” rating.

Risk factors: severe slowdown in domestic macroeconomic growth; risk of production safety; risk of fluctuations in production.