Incidents:

On April 26, 2024, Shanmei International released its report for the first quarter of 2024: in the first quarter of 2024, the company achieved operating income of 6.356 billion yuan, or -40.31%, net profit attributable to shareholders of listed companies of 583 million yuan, -65.81% year-on-year, and net profit attributable to shareholders of listed companies after deduction of 603 million yuan, or -65.44% year-on-year.

Investment highlights:

The decline in Q1 performance was mainly due to falling coal market prices, while the company's own coal production and sales volume declined.

Production and marketing: Self-produced coal products, sales volume declined. 2024Q1, the company achieved raw coal production of 7.514,600 tons, -15.0% month-on-month, -29.3%; commercial coal sales volume of 9.2947 million tons, -29.0% month-on-month, -25.1% year-on-year, including sales of self-produced coal of 5.4615 million tons, -30.9% month-on-month, -43.7% year-on-year, trade coal sales volume of 3.833,200 tons, -26.1% month-on-month, and +41.90% year-on-year.

Coal production in Shanxi Province declined significantly in the first quarter (-18.9% compared to the same period) due to factors such as Shanxi's “Three Supermarkets”, special remediation of hidden work surfaces, and stricter safety inspections. We anticipate that the decline in the company's production may also be affected as a result. Also, there is a big difference between the company's production and sales volume, and there may be some coal that has not been sold.

Prices and costs: Price declines affect performance. The average price of 2024Q1's own coal production was 662 yuan/ton, -17.1%; the average cost was 308 yuan/ton, +2.4%; the gross profit per ton of coal was 354 yuan/ton, -28.9% year-on-year. Due to falling coal prices and declining sales, Q1's total gross profit from self-produced coal was 1.93 billion yuan, -60% over the same period last year, which had a significant impact on performance.

Prices in the coal market have rebounded. Recently, the port thermal coal and main coking coal market prices have rebounded slightly. As of April 26, the final coal liquidation price at Qinhuangdao Port and the price increase of the main coking coal depot at Jingtang Port were 824 yuan/ton and 2,170 yuan/ton respectively, up 23 yuan/ton and 280 yuan/ton respectively from recent lows (April 12). Local coking coal and thermal coal prices in Shanxi have also stabilized or rebounded. As coal prices improve, the company's performance is expected to improve.

Profit forecast and valuation: Taking into account the company's coal production and sales volume and changes in coal market prices, the company's profit forecast is estimated to be $332/346/35.7 billion yuan respectively, and net profit to mother will be 35.39/38.06/4.071 billion yuan, respectively, -17%/+8%/+7% YoY; EPS is 1.78/1.92/2.05 yuan, respectively, corresponding to the current stock price PE is 7.95/7.39/6.91 times. The company's coal mining costs are low, asset quality continues to improve, there is plenty of room for future dividends, and maintains a “buy” rating.

Risk warning: risk of a sharp drop in coal market prices; risk of production safety accidents; risk of coal mine production progress falling short of expectations; risk of losses in trade coal business; risk of policy regulation exceeding expectations, etc.