Production exceeded 60 million tons, and high dividends continued to give back to shareholders

Lu'an Huanneng achieved net profit of 7.92 billion yuan in 2023, a year-on-year decrease of 44.1%; 1Q24 net profit fell 61.9% year-on-year to 1.29 billion yuan, a significant improvement over 4Q23's 650 million yuan (partly affected by the low base of year-end expense settlements). The decline in profits was mainly affected by the fall in coal prices, although production and sales surpassed 60 million tons for the first time in '23 partially offsetting the impact of falling prices.

The company plans to distribute a cash dividend of 15.89 yuan per 10 shares, maintaining a high dividend ratio of 60% and a dividend ratio of 6.5% (4/18 closing price). We maintain our judgment on the downward trend in coal prices in 24/25, but considering a larger than expected reduction in production in Shanxi and a stronger than expected increase in electricity demand, we narrowed the decline in the benchmark coal price and adjusted the 24-26E net profit forecast to 78.3/67.0/6.0.2 billion yuan (previous value: 74.2/57.6 billion yuan). Maintaining the “gain” rating, the target price of 25.2 yuan (previous value 19.8 yuan) is based on 9.6x 2024EPE (20% PE premium over the average since 2016, to reflect the valuation premium given by the market to high-dividend companies and more room for future group asset injection).

Production may have declined in '24, but the sales structure continues to be optimized

The company produced a total of 60.46 million tons of raw coal in 2023, an increase of 6.3% over the previous year. ; At the same time, the sales structure has also been optimized. The share of mixed coal sales with relatively low gross profit decreased from 56% in '22 to 53.5%, and the proportion of high-margin jet coal sales increased from 38.5% to 39.3%. Affected by the decline in the prosperity of the coal industry, the company achieved an average sales price of commercial coal of 728 yuan/ton throughout the year, a year-on-year decrease of 21.8% (203 yuan/ton); cost control continued to show results, and the unit sales cost of coal decreased by 3.3% to 348 yuan/ton year on year; and unit gross profit decreased 33% to 380 yuan/ton year on year. In the first quarter of this year, the company's raw coal production fell nearly 10% year on year to 14.7 million tons. Against the backdrop of Shanxi Province's “three super” coal mine reforms, the company's output will decline in 24 years. The comprehensive sales price of 1Q24's commercial coal increased by 38 yuan to 689 yuan/ton month-on-month, partially offsetting the impact of the decline in production and sales.

The leading advantages in the injection coal industry are outstanding, and there is still potential for expansion as a leading domestic coal injection enterprise. The company has high-quality scarce poor coal/lean coal required for blast furnace spraying. It is also the only national high-tech enterprise in the national coal industry. Excellent resource endowments and technical advantages have established the company's core competitiveness in the market. In terms of production scale, in addition to technical improvements in production mines, the Yuanfeng mine, Wuyang coal mine, and Houbao coal industries will also contribute a certain amount of growth in the future. At the same time, with state-owned enterprises in Shanxi Province deepening reforms and speeding up, the company still has plenty of room to expand scale and increase profits through the acquisition and integration of the Group's coal mine assets. The company has sufficient capital. It has entered a net cash position in 2022 and is expected to increase the net cash amount further, laying the financial foundation for high dividends and subsequent acquisitions to consolidate the Group's assets. Although the prices of coking coal and jet coal have declined since this year due to negative feedback from the steel industry to the raw material side, we believe that the profits of the steel coking coal industry chain are expected to gradually improve as downstream demand recovers; at the same time, the company's port jet coal auction sales will also effectively maximize efficiency.

Risk warning: Production disturbances exceeded expectations, and demand recovery was weaker than expected.