Key points of investment

Company Overview: A leading state-owned enterprise in East China, with a leading return on net assets in the industry, Huaibei Mining is a state-owned coal enterprise belonging to Anhui Province. The actual controller is the Anhui Provincial State-owned Assets Administration Commission. The company's resource endowment advantage is obvious. By the end of 2023, the company's total recoverable coal reserves reached 2.046 billion tons. In 2023, the company's main business (coal chemical and coal business) decreased by 5.28% and 14.75%, respectively, and the overall share of total revenue was 43.37%. The decline in main business profit contributed to the company's overall gross profit of 13.849 billion yuan in 2023, a year-on-year decrease of 13.38%. The company's ROE is above the industry average, the balance ratio is low, and the company's P/E and P/B are below industry values.

Coal business: Leading producer of high-quality coking coal, sector revenue maintained steady growth. The company maintained steady growth in the coal sector revenue from 2019 to 2023. Although coal prices fluctuated and declined in 2023, the company's coal sector's profit was stable. At the same time, the Taohutu coal mine under construction by the company is of excellent coal quality. It is expected that construction will be completed and put into operation during the “14th Five-Year Plan” period. The total profit achieved after the project reaches production is about 1.04 billion yuan.

In terms of coking and refined coal, the production rate has been rising year after year. The production rate of refined coal in 2023 was 52.34%, an increase of 2.14 percentage points over the previous year, and its operating income accounts for a significant share of total coal business revenue. The company focuses on long-term coordination mechanisms to reduce the risk of price fluctuations, and has a gross profit of tons of coal that is higher than the industry level.

Coal chemical business: Costs and prices are declining, and profitability is expected to pick up. The main products in the company's coal chemical business are coke and methanol. The price of raw coal fell in 2023, and the cost of coal chemical business fell. However, at the same time, due to the decline in the market price of the product itself, operating income and operating profit decreased by 14.75% and 9.05%, respectively. At the same time, the company has five projects under construction, actively plans industrial chain extension projects such as ethanol, coke by-products, hydrogen, etc., and continues to expand and extend the industrial chain. Due to continuous economic recovery and favorable real estate policies, coke prices are expected to rise in the future, boosting the company's profitability. At the same time, as of 2023, the “Coke Oven Gas Comprehensive Utilization Methanol Production Project” has not been fully completed. It is expected that methanol production will further increase after delivery and drive revenue growth.

Profit forecasting and valuation

We forecast that the company's net profit for 2024-2026 will be 6.502, 7.266, and 8.361 billion yuan, up +4.46%, +11.75%, and +15.06% year-on-year. Earnings per share for 2024-2026 were 2.41, 2.70, and 3.10 yuan/share, respectively. The current price is 6.27 times PE in 2024, which is 8.17 times lower than the average PE of comparable companies. The current price is 0.97 times the 2024 PB, which is 1.01 times lower than the average PB of comparable companies. Compared to comparable companies, Huaibei Mining's overall profitability is outstanding, performance is steady, and there is room for repair in valuation. Covered for the first time, a “gain” rating was given.

Risk warning

Economic recovery fell short of expectations, coking coal prices fell beyond expectations, production capacity release fell short of expectations, and policy risks.