Incident: On April 19, 2024, Lu'an Huanneng released its 2023 annual report. In 2023, the company achieved operating income of 43.137 billion yuan, a year-on-year decrease of 20.55%, and realized net profit of 7.921 billion yuan, a year-on-year decrease of 44.11%; net profit after deduction was 7.889 billion yuan, a year-on-year decrease of 45.11%. Net cash flow from operating activities was 8.852 billion yuan, down 73.79% year on year; basic earnings per share were 2.65 yuan/share, down 44.09% year on year. The balance ratio was 43.04%, down 5.04pct year over year.

In the fourth quarter of 2023, the company's revenue for a single quarter was 10.124 billion yuan, down 29.3% year on year, down 9% month on month; net profit for the single quarter was 652 million yuan, down 86.7% year on year, down 67% month on month; net profit after deduction for the single quarter was 647 million yuan, down 87.4% year on year and 67.2% month on month.

In the first quarter of 2024, the company's revenue for a single quarter was 8.659 billion yuan, down 27.2% year on year, down 14.5% month on month; net profit for the single quarter was 1,288 billion yuan, down 61.9% year on year, up 97.5% month on month; net profit after deduction for the single quarter was 1,285 billion yuan, down 61.7% year on year, up 98.6% month on month.

Comment:

The sharp drop in coal prices affected the 2023 results, and the gross margin level remained high. In 2023, the company's raw coal production was 60.4 million tons, up 3.5 million tons (+6.2%) year on year; of these, raw coal production in the fourth quarter was 15.48 million tons, up 2.27 million tons (+17.2%) year on year. In 2023, the company sold 55 million tons of commercial coal, up 2.06 million tons (+3.9%) year on year; of these, commercial coal sales in the fourth quarter were 14.59 million tons, up 290,000 tons (+2.0%) year on year. Affected by the sharp drop in commercial coal prices, the company sold 727 yuan/ton in 2023, down 203 yuan/ton (-21.8%) from 931 yuan/ton in the same period last year. However, it should be noted that the company continues to strengthen cost control. The company's cost per ton of coal in 2023 was reduced to 348 yuan/ton, down 12 yuan/ton (-3.3%) from 359 yuan/ton in the same period last year. Overall, the year-on-year decline in the company's coal prices combined with cost control. The gross margin of the company's coal business remained high in 2023, reaching 52.22%, down 9.16 pcts from 61.4% in the same period last year.

The company continues to implement the “Good Year” high-percentage dividend policy. In 2023, we responded positively to the country's policy direction of “improving the quality and investment value of listed companies”, actively echoing the Shanghai Stock Exchange's call for action to “improve quality, efficiency and return”, and respond positively to investors' reasonable demands for cash dividends. The ratio of the company's cash dividends to net profit attributable to common shareholders of listed companies in the consolidated statements was still 60%. The amount of cash dividends (including tax) was 4.753 billion yuan, with a dividend of 15.89 yuan per 10 shares, reflecting the company's “good shareholder” concept.

The company continues to strategically expand resources and do a good job of “addition”. The company adheres to the development principle, accelerates resource expansion, project construction, technological transformation, mergers and acquisitions, industrial expansion and product upgrading, promotes the expansion of the scale of the coal coke industry, the improvement of industrial quality, product structure optimization, and overall improvement of development strength. The procedures for increasing production capacity at the four mines in Heilong, Yita, Heilongguan and Cilinshan were completed during the year.

In accordance with the principle of “being able to compete and get everything”, focus on market-based bidding for finished resources such as Shanghai and Xiying and expansion resources such as Wuyang and Houbao, and take appropriate opportunities to promote the injection of coal assets by controlling shareholders.

Low long-term cooperation brings high performance flexibility, and net cash highlights investment value. The company's share of the company's electricity and power supply is relatively low. Most of it is market coal sales. In particular, the injection coal long-term association locks in volume and price. The price of jet coal follows market price fluctuations, which is expected to support the rapid growth of the company's performance when coal prices rise. At the same time, it should be noted that as of the 2023 annual report, the company's monetary capital was 26.75 billion yuan, interest-bearing debt was 4.496 billion yuan, and the cash coverage ratio for interest-bearing debt reached 595%, reflecting the company's excellent asset quality and sound business philosophy.

Profit forecast and investment rating: We believe that Lu'an Huanneng is a leader in the domestic coal injection industry. It has excellent coal assets, strong cost control, combined with endogenous epitaxial growth in production capacity and a high proportion of market coal sales. The company operates steadily while also having high growth potential. We expect the company's 2024-2026 net profit to be 8.092 billion, 8.09 billion yuan, 9.391 billion, and EPS of 2.71/2.98/3.14 yuan/share; as of April 18, the 2024-2026 PE will be 8.87/8.06/7.64 times; we are optimistic about the company's revenue space and maintain the company's “buy” rating.

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