Introduction to this report:

2024Q1 is affected by the “Three Supermarkets” and sales are declining; volume and price pressure is expected to pass, and Q2 is expected to reach an inflection point; performance falls short of expectations due to increased billing for 2023Q4, and the 2024Q1 coke business is expected to drag down performance.

Key points of investment:

Maintain an “Overweight” rating. The company announced its 2023 annual report, with operating income of 43.137 billion yuan (-20.55%) and net profit of 7.922 billion yuan (-44.11%); at the same time, it also announced the 2024 quarterly report, achieving operating income of 8.659 billion yuan (-27.19%) and net profit to mother of 1,288 billion yuan (-61.9%), lower than market expectations. Considering the decline in sales volume under the influence of Shanxi's “Three Supermarkets”, we lowered EPS for 24 and 25 to 2.29 and 2.59 yuan (originally 4.04 and 4.04 yuan), and added the 26-year EPS to 2.92 yuan. The target price was adjusted to 27.94 yuan (+7.5 yuan) based on the comparable company's 2024 average estimate of 12.2x PE.

Sales declined in 24Q1 due to Shanxi's “Three Supermarkets”. In 2023, the company produced 60.46 million tons of raw coal (+6.3%), sold 54.98 million tons (3.9%) of commercial coal, the average price was 727.6 yuan/ton (-203.1 yuan/ton), and the ton cost was about 347.7 yuan/ton (-12 yuan/ton). Affected by the “Three Supermarkets” of Shanxi Province, 24Q1 achieved raw coal production and commercial coal sales of 1,324 and 11.81 million tons (-9.93% and -7.08%), respectively, with an average price of about 685 yuan/ton (-189 yuan/ton), and a ton cost of 394 yuan/ton (+18 yuan/ton).

Volume and price pressure is expected to be over, and Q2 is expected to reach an inflection point. The “2024 Work Plan for Stable Coal Production and Supply in Shanxi Province” proposes that the province's annual coal production target is about 1.3 billion tons, a year-on-year decrease of about 50 million tons. Considering that the decline in coal production in Shanxi reached 38 million tons in January-January, and the monthly output is expected to drop by only 1.2 million tons for the next 10 months, the maximum downward pressure on the production of enterprises in Shanxi has passed.

Performance fell short of expectations due to increased 2023Q4 cost accruals, and the 2024Q1 coke business is expected to drag down performance. The company's 2023Q4 management expenses and R&D expenses increased sharply month-on-month, and the increase in the cost side caused Q4 performance to fall short of market expectations. The company currently has a coke production capacity of 1.4 million tons. Since the beginning of the year, the coke industry has lost money, which has dragged down the company's performance in Q1.

Risk warning: The macroeconomy fell short of expectations; coal prices fell more than expected.