Investment highlights

For the first time, Huaibei Mining (600985) was given an outperforming industry rating. The target price was 23.00 yuan. Based on the P/E valuation method, the 2024-25 P/E was 10x and 9x. The reasons are as follows:

Main coking coal: There is a tight balance between supply and demand throughout the year, and medium- to long-term supply elasticity is seriously inadequate. We judge that short-term molten iron production has remained stable. Since May, production has resumed at an accelerated pace in Shanxi, and 2-3Q24 production capacity has increased marginally from month to month, but the supply and demand for coking coal is still in a tight balance throughout the year. At the same time, demand for construction steel has recovered in the second half of the year. We are optimistic that the price of high-quality main coking coal will operate at a high level. Looking at the medium to long term, China's coking coal stocks can be harvested for less than 30 years. Currently, new production capacity is being added or mines with nuclear expansion conditions concentrate thermal coal, and domestic coking coal supply is not flexible enough. There is not much room for growth on the import side, and is constrained by factors such as international relations, and supply stability is not strong. Against the backdrop of a sharp drop in imports of high-quality Australian coal in recent years, China's coking coal shows structural and regional shortages. The supply gap for high-quality main coking coal has widened, and scarce resources have become a hard constraint. In the future, under the high-quality production of blast furnaces, the proportion of coking coal with strong adhesiveness is expected to increase. We judge that the price of main coking coal has strong toughness, and the price difference between main focus and coking coal may widen.

Huaibei mining: It has advantages in resource reserves, coal quality structure, and location, and the new mine continues to have production capacity.

The company is backed by the Anhui State-owned Assets Administration Commission. The 17 production mines are all located in the Huaibei mining area, close to large steel mills and power plants in East China, and the location advantage is obvious. In 2023, the company has recoverable reserves of 2.05 billion tons, an approved production capacity of 35.85 million tons, a mining period of about 57 years, commercial coal production of 21.97 million tons, and a production rate of coking coal of 52%, of which more than 70% are high-quality main coke, fertilizer coal, etc. In 2021, the company put into operation 3 million tons of Xinhu coal mine, and is expected to put into operation 8 million tons of Taohutu coal mine (6,000 kcal thermal coal) by the end of 2025, completing medium- to long-term continuous high-quality production capacity. The company has excellent asset quality: net operating cash flow of 13 billion yuan in 2023, monetary capital+transactional financial assets of 8.6 billion yuan, balance ratio of 52%, dividend ratio of 43%, average ROE over the past five years is 23%; the company is expected to enhance its dividend capacity after the Taohutu project is implemented at the end of 2025.

I am optimistic that the volume and price increase of coal will be stable in 2024-26, and the coal chemical industry will reduce losses year on year. Due to the suspension of effluent production from the Lake Mine and the impact of regional safety supervision, 2H23 production and sales are currently being suppressed. Currently, the Xinhu Mine is expected to resume production in 3Q24. We are optimistic that production will increase steadily in 2024. After Xinhu resumed production in 2025, steady state production will be around 24 million tons (up 9% from 23), and Taohutu's production capacity release of 8 million tons will continue to increase in 2026. Due to poor demand, the company's coal chemical business lost more than 1.3 billion yuan in 2023. With the release of ethanol and DMC production capacity in 2024, the coal chemical business is expected to reduce year-on-year losses in 2024. At the same time, due to the company's multi-site layout of non-coal mines, gravel aggregate mines are scheduled to be put into operation one after another in 2024-25, contributing to the increase.

What is our biggest difference from the market? The market is concerned about coal price performance due to weak short-term demand. We are optimistic about short-term main coking coal price resilience and medium- to long-term core coking coal value revaluation.

Potential catalysts: terminal demand recovery; the company's Xinhu coal mine resumed production.

Profit forecasting and valuation

We expect the company's 2024-25 EPS to be 2.34 yuan, 2.55 yuan, and the CAGR will be 5%, corresponding to 2024-25 P/E of 8x and 7x; we will cover the company for the first time, giving a performance industry rating and target price of 23.00 yuan, and the target price corresponding to 2024-25e P/E will be 10x and 9x, implying 33% upside.

risks

Demand fell short of expectations; imported coal supply exceeded expectations; the company's resumption of production at the Xinhu Coal Mine fell short of expectations.