Investment positives
We initiate coverage on Huaibei Mining Holdings Co., Ltd. (Huaibei Mining) with an OUTPERFORM rating and a target price of Rmb23.00, implying 10x 2024e and 9x 2025e P/E.
Why an OUTPERFORM rating?
Prime coking coal: A tight balance between supply and demand; supply side may lack growth momentum in the medium and long
term. We anticipate stable hot metal output in China in the near term, as factories in Shanxi have accelerated production resumption since May and their production capacity increased QoQ in 2-3Q24. However, we think the supply and demand dynamics of coking coal throughout 2024 will still be tight. Given the potential recovery in steel demand from the construction sector in 2H24, we expect prime coking coal prices to be relatively high.
The growth in coking coal supply in China may lack momentum in the medium and long term, as existing domestic coal mines may only support less than 30 years of mining and most new capacity and mines approved for expanding capacity are related to thermal coal. Regarding coal imports, we foresee limited growth upside and unstable supply due to geopolitical factors. The sharp decline in quality coal imported from Australia in recent years has caused structural and regional shortages of coking coal in China. Consequently, the supply of quality prime coking coal in China has further tightened and resource scarcity has presented a formidable constraint.
The proportion of prime coking coal will likely increase amid blast furnace- based high-quality production. In our view, prices of prime coking coal will likely remain high, and the price spread between prime coking coal and coal blending will likely widen.
Huaibei Mining has advantages in resource reserves, coal quality, and locations of mines; new mines to contribute additional capacity.
The firm is directly managed by the State-owned Assets Supervision and Administration Commission of Anhui Province. It has 17 in-service mines in Huaibei area (the north of Anhui province), and these mines are close to large steel mills and power plants in eastern China. In 2023, the firm had 2.05bnt of mineable resources and 35.85mnt of approved production capacity. Its coal mines, with around 57 mining years, produced 21.97mnt of commercial coal in 2023. Specifically, bituminous coal accounted for 52% of the firm's coal output, and 70% of the bituminous coal were quality prime coking coal and fat coal.
Huaibei Mining commenced operation of its Xinhu coal mine with capacity of 3mnt in 2021. It plans to put 8mnt of 6,000kcal thermal coal capacity at the Taohutu mine in Inner Mongolia into operation at end-2025, aiming to ensure quality coal supply in the medium and long term.
In 2023, net operating cash flow of the firm was Rmb13bn, and financial assets, cash, and bank balances were Rmb8.6bn. Its liability-to-asset ratio was 52% and dividend payout ratio was 43% in 2023, and return on equity (ROE) averaged 23% in the past five years. The firm will likely increase dividends after its Taohutu project comes online at end-2025.
We expect coal sales volume to increase and prices to remain stable in 2024-2026; losses from coal chemical business to decline YoY.
Production and sales volume at the Xinhu mine were dampened in 2H23 by production suspension and regional safety supervision. The Xinhu mine is likely to resume production in 3Q24 and the new production capacity at Yuandian Erkuang mine has been unleased. Therefore, we expect the firm's coal output to increase moderately in 2024, to approach 24mnt in 2025 after the Xinhua mine resume production (up 9% from the 2023 level), and to continue to ramp up as the 8mnt of capacity at the Taohutu mine starts operating in 2026.
The firm's coal chemical business reported losses of more than Rmb1.3bn in 2023 due to sluggish demand. We expect its losses to narrow in 2024 as ethanol and dimethyl carbonate (DMC) capacity ramps up. The firm is expanding its coverage of non-coal mines, and its mines that produce sand, gravels, and aggregate are scheduled to come online and generate earnings in 2024-2025.
How do we differ from the market? The market worries about negative impact from short-term weak demand on coal prices. We are upbeat on prime coking coal prices in the short term and expect the value of prime coking coal to experience re-rating in the medium and long term.
Potential catalysts: Demand recovers; Xinhu coal mine resumes production.
Financials and valuation
We estimate the firm's EPS at Rmb2.34 in 2024 and Rmb2.55 in 2025, implying a CAGR of 5%. The stock is trading at 8x 2024e and 7x 2025e P/E. We initiate coverage on Huaibei Mining with an OUTPERFORM rating and a target price of Rmb23.00, implying 10x 2024e and 9x 2025e P/E, offering 33% upside.
Risks
Demand lower than expected; coal imports higher than expected; production resumption at Xinhu coal mine slower than expected.