Core views:
Company Overview: The pure coking coal standard for Hong Kong stocks has outstanding resources and profitability. The company has three coking coal mines in Liulin County, Shanxi Province, in Xingwu, Jinjiazhuang, and Zhaiyadi, supporting the construction of a Kengkou coal preparation plant. The three mines have approved a total production capacity of 5.25 million tons/year and an equity production capacity of 4.34 million tons/year. The company produced 5.25 million tons of raw coal in 2023, and the production and sales volume of refined coal were 3.25 and 3.1 million tons respectively, of which low-sulphur and medium- and high-sulfur refined coal sales accounted for 28% and 72%, respectively.
Industry trends: Domestic supply is clearly limited, and demand for coking coal is improving. There was a significant correction in coal prices in the first quarter. Currently, coal prices in production markets are generally about 200 yuan/ton lower than the Q2 long-term bargain price. The Shanxi Sanchao governance has had a certain impact on coking coal supply expectations (domestic coking and refined coal production was reduced by 8.2% in the first 2 months), and with the increase in capital availability, demand for terminals in the industrial chain is expected to improve marginally during the peak construction season (blast furnace construction and molten iron production began to gradually pick up since mid-March). Currently, coking coal stocks in ports and downstream links are at medium to low levels during the same period, and the coking coal market is expected to gradually improve.
Company advantages: High operating efficiency, outstanding profitability, rich shareholder returns and strong sustainability.
Although the company is small, the business is simple, the operation efficiency is high, the cost control capacity is strong, and the refined coal washing out rate and profitability are far higher than those of its peers. Since the company's balance ratio is extremely low, there are no interest-bearing liabilities or financial burdens, and there is no new mine construction, there is little pressure on maintenance capital expenditure, abundant cash flow, and strong dividend capacity and sustainability. Since 2009, the company has insisted on paying dividends twice a year, with an average dividend ratio of 83% over the years. In addition, the company has repurchased shares many times, and has now repurchased 450 million shares, or 8.4%. The company actively rewards shareholders and highlights the value of a high-quality company.
Profit forecasting and investment advice. The company's 24-26 EPS is expected to be HK$0.39/0.40/share, respectively. Referring to comparable companies and the company's historical valuation center, the company will be given 1x PB in 24 years, corresponding to a reasonable value of HK$3.95 per share. For the first time, coverage is given, and a “buy” rating is given.
Risk warning. Domestic demand is likely to fall short of expectations. If coal imports grow too fast, coal prices will fall more than expected. If a coal mine safety accident occurs, the company's production and costs may be affected.