Incident: Jizhong Energy released its 2023 annual report: In 2023, the company achieved operating income of 24.330 billion yuan, a year-on-year decrease of 32.49%, net profit to mother of 4.944 billion yuan, an increase of 10.83% over the previous year, and net profit to mother after deduction was 3,078 billion yuan, a decrease of 30.03% year-on-year. Basic earnings per share were 1.40 yuan, up 10.84% year on year, and the weighted average return on net assets was 22.66%, up 1.24 pct year on year.

On a quarterly basis, in the fourth quarter of 2023, the company achieved operating income of 3,974 billion yuan, a decrease of 29.09%, a year-on-year decrease of 43.12%; realized net profit of 1,028 million yuan, an increase of 87.34%, and a year-on-year increase of 117.46%; and realized net profit of 659 million yuan after deduction, an increase of 21.01% over the previous year and a year-on-year increase of 70.95%.

Comment:

The cost of the coal business was properly controlled, and gross margin increased year-on-year. 1) Production and sales volume: According to the company's 2023 annual report, the company's coal production in 2023 was 274.12,200 tons (+3.97% YoY), with coal sales volume of 26.387 million tons (YoY -9.96%), of which refined coal production was 9.956 million tons (YoY -21.99%), sales volume was 9.6648 million tons (YoY -22.75%); coal washing and blended coal production was 5.23,300 thousand tons (YoY +4.79%); For 1,643 million tons (-20.95% YoY), sales volume was 1.707 million tons (-18.28% YoY). 2) Price and cost: In 2023, the comprehensive sales price of the company's commercial coal was 720.56 yuan/ton (-27.98%), of which the average selling price of raw coal was 420.17 yuan/ton (+2.12%), the average selling price of washed refined coal was 1307.55 yuan/ton (-28.16%), the average selling price of washed mixed coal was 349.88 yuan/ton (-11.70% YoY), and the average selling price of slime and other coal was 192.77 yuan/ton (YoY +16.76%); Ratio- 36.00%). 3) Profit: In 2023, coal achieved a gross profit of 333.64 yuan/ton per ton of coal (-11.25% year-on-year), mainly due to falling coal prices.

Overall, in 2023, the company's coal achieved operating income of 19.352 billion yuan (-34.13% year over year), and the operating cost of coal was 10.664 billion yuan (YoY -42.37%). Mainly due to a decrease in external purchases of raw coal washing, coal achieved gross profit of 8.687 billion yuan (-20.09% YoY), and the gross margin of coal was 44.89% (year-on-year increase of 7.88pct).

The volume and price of the chemical business have plummeted, and performance is expected to pick up due to falling costs. According to the company's 2023 annual report, the company's coke production in 2023 was 1.021 million tons (-9.23% YoY), the coke sales volume was 981,800 tons (-11.13% YoY); the production of caustic soda was 199,700 tons (-1.70% YoY), and the sales volume of caustic soda was 183,000 tons (-3.79% YoY). In 2023, the company's chemical business achieved revenue of 3,932 billion yuan (-26.52% YoY), operating costs of 3.793 billion yuan (-23.31% YoY), gross profit of 139 million yuan (-65.64% YoY), and gross margin of 3.54% (year-on-year decrease of 4.04pct).

In terms of other business, the building materials business achieved revenue of 973 million yuan (-13.73%), operating costs of 809 million yuan (-1.37% year over year), gross profit of 164 million yuan (-46.70% year over year), and gross margin of 16.84% (year-on-year decrease of 10.42 pct). The power business achieved operating income of 39 million yuan (-10.66% YoY), operating costs of 84 million yuan (-20.10% YoY), realized gross profit of -45 million yuan (-26.73% YoY), and gross margin of -116.70% (YoY increase of 25.60 pct).

The dividend rate is 7.57%, and high dividends give back to shareholders. In terms of dividends, the company plans to pay a cash dividend of 0.6 yuan (tax included) per share in 2023. The total cash dividend amount (tax included) is 2.120 billion yuan (tax included). Based on the closing price of 7.93 yuan/share on April 12, 2024, the dividend rate is 7.57%. According to the company's “Shareholder Return Plan for the Next Three Years (2023-2025)”, if the company's development stage is mature and there are no major capital expenditure arrangements, cash dividends should account for at least 80% of the current profit distribution when profit distribution is carried out. In the context of high dividends in the industry, the company is expected to continue to have high dividends and further strengthen shareholder returns.

The total increase in production capacity after completion of the coal project is 1.8 million tons/year, and production is expected to increase further. The company's Xingtai West Well has a production capacity of 600,000 tons. Currently, the project has been completed and is in the trial production stage. Production is expected to reach production in 2024; the Inner Mongolia mining area increased 1.2 million tons/year, including 900,000 tons/year in Jiaxinde and 300,000 tons/year in Jiadong, and is currently undergoing the process of increasing production capacity. As of May 15, 2023, the total geological reserves of the company's mines are 2,931 million tons, with an annual approved production capacity of 32.65 million tons. Coal production is expected to increase further in 2024.

Inefficient assets have been divested one after another, and the industrial structure has been continuously optimized. According to the company's 2023 annual report, the company sold part of Xingbei Coal's debts and all assets and liabilities at a price of 67.8 million yuan to optimize the industrial structure and achieve stable operation; the company sold 56.04% of the company's shares in Jinniu Chemical at a price of 2,318 billion yuan. The transaction is expected to increase the pre-tax profit and loss of the company's 2023 consolidated financial statements by about 1.6 billion yuan; the company sells 72% of Qianxin Coal's shares at a price of 1,035 billion yuan. Through the transfer of shares in the Qianxin Coal Industry, it is possible to quickly return capital, revitalize idle assets, and achieve state-owned ownership Preserving and increasing the value of assets.

Overall, in 2023, the company sold 67.8 million yuan of assets and 3.353 billion yuan of shares, which helped the company divest inefficient assets and further optimize the industrial structure.

Profit forecasting and investment advice. We recommend Jizhong Energy based on the following three aspects: 1) The company is rich in coal resources and excellent coal quality. In particular, the coal used for coking produced in Hebei Province has strong market competitiveness. 2) Downstream industries such as coking and steel are well developed within the company's region, and have obvious economic and regional advantages. 3) After the company divests its inefficient assets, it is expected that the quality of the company's operations and dividend returns will be further improved. We expect that in 2024-2026, the company will achieve revenue of 25.722 billion yuan, 27.186 billion yuan, 28.651 billion yuan, net profit due to mother of 3.374 billion yuan, 3,925 billion yuan, EPS (diluted) of 0.95 yuan, 1.05 yuan, 1.11 yuan, and PE of 8.3x/7.6x/7.1x based on a closing price of 7.93 yuan/share on April 12, 2024. For the first time, coverage gives the company an “increase in holdings” rating.

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