China Coal proposes a special DPS of RMB0.113 for 2023 on top of the regular DPS already announced. It further proposes to distribute interim dividend for 2024 with payout ratio no less than 30%. The distribution of special dividend for 2023 effectively raises its payout ratio to 37.7% of its earnings under CAS. We believe its payout will stay at least at this level for future years given its healthy cashflow and improved balance sheet. This will make its dividend yield more in line with its peers. Hence, we upgrade our rating from SELL to HOLD and increase our target price to HK$8.59.
Key Factors for Rating
Adding the special DPS of RMB0.113 to the regular final DPS of RMB0.442 for 2023, the total DPS of 2023 will be RMB0.555. This will increase the effective payout ratio from 30% to 37.7% based on its earnings under CAS. (The company pays its dividend based on the lower of its earnings under IFRS and CAS.)
The proposed distribution of interim dividend is also a positive development as investors no longer have to wait for a year to get paid. While the proposed payout ratio of interim dividend is at least 30%, we believe the company will maintain its full-year payout at no less than 37.7% for future years.
After the strong earnings in the past three years, the company was in net cash by the end of 2023. Even if we assume the capex in 2025 and 2026 to stay at the same level as 2024, we still expect the company to generate free cashflow of RMB11-13bn in 2024-26. It indeed has the capacity to raise its payout ratio.
As it has been so difficult to get the company to raise its payout ratio, we believe the company will keep its payout ratio unchanged for a period of time before raising it further. As the increase in effective payout ratio now makes its dividend yield more in line with its peers, we upgrade our call to HOLD.
Key Risks for Rating
Sharp fall in coal prices.
Lower-than-expected profit of coal chemical business.
Valuation
We increase our target price for its H shares from HK$7.19 to HK$8.59. We change our target valuation from 0.57x 2024E P/B to 5.5% average dividend yield for 2024-26E. We set our target price at the higher of P/B based method and dividend yield based method. The effective increase in payout ratio has prompted us to switch from the former to the latter.