Incident: Shanmei International released its 2023 annual report: In 2023, the company achieved operating income of 37.371 billion yuan, a year-on-year decrease of 19.45%, net profit to mother of 4.260 billion yuan, a year-on-year decrease of 38.53%, and net profit to mother after deduction was 4.409 billion yuan, a year-on-year decrease of 38.23%. Basic earnings per share were 2.15 yuan, a year-on-year decrease of 38.57%. The weighted average return on net assets was 28.51%, a year-on-year decrease of 23.32pct.

On a quarterly basis, in the fourth quarter of 2023, the company achieved operating income of 8.472 billion yuan, an increase of 3.03% and a year-on-year decrease of 21.26%; realized net profit of 264 million yuan, a decrease of 71.15% and a year-on-year decrease of 83.36%; and realized net profit of 337 million yuan after deduction, a decrease of 64.00% month-on-month and a year-on-year decrease of 79.99%.

Comment:

Coal production business: Volume and price have plummeted, and metallurgical coal production has dropped significantly. 1) Production and sales volume: According to the company's 2023 report, in 2023, the company's self-produced coal production was 389.8837 million tons (-3.92% YoY), and the sales volume of self-produced coal was 34.8599 million tons (-5.68% YoY), of which thermal coal production was 289.357 million tons (+2.94% YoY), mainly due to the completion and operation of the Zhuangzihe Coal Industry, with a sales volume of 26.611,000 tons (+3.09% YoY); metallurgical coal production was 1.048 million tons (YoY -19.39%), sales volume 2.88 10,000 tons (YoY- 26.04%) 2) Price and cost: In 2023, the average sales price of the company's own coal was 682.66 yuan/ton (-7.44% YoY), of which the average sales price of thermal coal was 507.96 yuan/ton (-10.21% YoY), and the average sales price of metallurgical coal was 1248.07 yuan/ton (+9.83% YoY); the average sales cost of the company's own coal was 280.89 yuan/ton (+43.60% YoY), of which the average sales cost of thermal coal was 190.86 yuan/ton (+28.62% YoY), with the average sales cost of thermal coal being 190.86 yuan/ton (+28.62% YoY) For 572.25 yuan/ton (+87.48% YoY).

3) Profit: In 2023, self-produced coal produced a gross profit of 401.78 yuan/ton of coal (-25.86% YoY), of which the gross profit of a ton of thermal coal was 317.10 yuan/ton (-24.02% YoY), and the gross profit of a ton of metallurgical coal was 675.82 yuan/ton (-18.69% YoY), mainly due to falling coal prices.

Overall, in 2023, the company's coal production business achieved operating income of 23.798 billion yuan (-21.34% year on year), operating cost of 9.792 billion yuan (-3.05% year on year), achieved gross profit of 14.06 billion yuan (year on year -3 0.07%), and gross margin of 58.85% (down 7.76 pct year on year), of which thermal coal gross margin was 62.43% (down 4.50 pct year on year), and the gross margin of metallurgical coal was 54.15% (year-on-year decrease of 12.12 pcts).

Coal trading business: Trade volume increased year-on-year, and gross margin increased slightly. 1) Production and sales volume: According to the company's 2023 report, the company's trade coal sales volume in 2023 was 17.6454 million tons (+4.29% year over year). 2) Price and cost: The average sales price of the company's traded coal in 2023 was 731.73 yuan/ton (-33.54% YoY); the average sales cost of the company's traded coal was 700 yuan/ton (-33.80% YoY). 3) Profit: In 2023, trade coal achieved a gross profit of 31.73 yuan/ton per ton of coal (-27.39% year over year), mainly due to falling coal prices.

Overall, in 2023, the company's trade coal business achieved revenue of 12.912 billion yuan (-17.43% YoY), operating costs of 12.352 billion yuan (-17.87% YoY), gross profit of 560 million yuan (-24.28% YoY), and gross margin of 4.34% (YoY increase of 0.51 pct).

The dividend rate is 3.79%, and the dividend prospects are promising. In terms of dividends, the company plans to pay a cash dividend of 0.65 yuan (tax included) per share in 2023. The total cash dividend amount (tax included) is 1,289 million yuan (tax included). Based on the closing price of 17.16 yuan/share on March 29, 2024, the dividend ratio is 3.79%, accounting for 30.25% of the company's net profit to the mother in 2023. According to the “2024-2026 Shareholder Return Plan of Shanmei International Energy Group Co., Ltd.”, the profit distributed by the company in cash from 2024 to 2026 is not less than 60% of the distributable profit achieved in that year. In the context of high dividends in the industry, there is room for further improvement in the company's dividends.

Two major coal mines have been completed and put into operation, which is expected to further contribute to the increase in coal. The company strengthened the construction of advanced production capacity. On November 1, 2023, Zhuangzihe Coal passed the completion and acceptance of the 1.2 million tons/year mine merger, restructuring and integration project, marking the official transformation of the Zhuangzihe Coal Industry from an infrastructure mine to a production mine. Meanwhile, in 2023, Xinshun Coal Industry was completed and put into operation, contributing to the increase in thermal coal. The two major coal mines were successfully completed and put into operation, which is expected to further contribute to the increase in coal production and speed up the release of production capacity.

Profit forecasting and investment advice. We recommend Shanmei International based on the following three aspects: 1) The company's mining area is rich in coal varieties, and has formed production bases for thermal coal, coking coal, and anthracite. 2) The company has established coal trading companies and shipping sites in major coal production sites across the country, and the coal trade business location and market advantages are remarkable.

3) The company implements a cost-leading strategy and maintains the industry's leading cost level through continuous optimization of the cost control system. In 2024-2026, we expect the company to achieve operating income of 39.184 billion yuan, 40,951 billion yuan and 42,656 billion yuan, net profit due to mother of 4.139 billion yuan, 4.500 billion yuan and 4.710 billion yuan, EPS (diluted) of 2.09 yuan, 2.27 yuan, and 2.38 yuan, corresponding PE of 8.2x/7.6x/7.2 with a closing price of 17.16 yuan/share on March 29, 2024.

Risk warning: Production safety accidents in key coal mines, downstream demand falls short of expectations, systematic decline in coal prices, stricter safety and environmental protection policies