Incident: On August 7, 2024, the company issued an announcement stating 1) It plans to purchase 51.0095% of Tianyue Coal's shares held by Xinyi Group through the issuance of shares. The transaction price is tentatively not more than 0.35 billion yuan. 2) Release the business performance forecast for 2025 to 2027; 3) The company conducted a subcoal aluminum geological survey of 8 mines including the Sendayuan coal mine. The total estimated bauxite resources were 0.116 billion tons, and the total production capacity was estimated at 6.9 million tons/year.

The acquisition is undervalued. According to the announcement, based on Tianyue Coal's average annual net profit of 0.134 billion yuan after merger, the price-earnings ratio corresponding to the provisional transaction price of 0.35 billion yuan is 5.14 times; assuming that after the acquisition is completed, through effective integration of the underlying assets and the introduction of the Yongtai Energy Management Model, the company expects Tianyue Coal's annual net profit to exceed 0.16 billion yuan. Based on this calculation, the price-earnings ratio corresponding to the provisional transaction price of 0.35 billion yuan is 4.29 times.

Coking coal production capacity can be increased by 0.6 million tons/year, and at the same time, it can form a “three-mine contiguous” scale effect. According to the announcement, prior to this transaction, Yinyuan Coal Coke, a wholly-owned subsidiary of the company, successfully bid through the Alibaba Judicial Auction website and already held 12.2476% of Tianyue Coal's shares. After the transaction is completed, the company will directly and indirectly hold a total of 63.2571% of Tianyue Coal's shares. According to the announcement, after the transaction is completed, the company's high-quality coking coal resource reserves can increase by 28.3696 million tons, an increase of 1.16%, and coking coal production capacity can increase by 0.6 million tons/year, an increase of 3.51%. After the transaction is completed, the Fengjiatan mining area and Dangdangling mining area, which were originally divided by the listed company, will be connected to Tianyue Coal Mine to form a geographical advantage of “three contiguous mines”, which can optimize the deep coking coal resource development plan in the Fengjiatan mining area, create a scale effect, and reduce mining costs.

The company's net profit is expected to continue to grow in the future. The company expects net profit attributable to shareholders of listed companies from 2025 to 2027 to be 2.8 billion yuan (+23.58% compared to 2023), 3.8 billion yuan (+35.71% year over year), and 5.8 billion yuan (+52.63% year over year), respectively. In addition, it is estimated that the Haizetan Coal Mine will produce 10 million tons of coal in 2027. According to preliminary estimates of average coal prices in 2023, it will bring in additional revenue of about 9 billion yuan, net profit of about 4.4 billion yuan, and additional net operating cash flow of about 5.1 billion yuan.

It is expected to obtain bauxite mining rights, and the value of the company's assets is expected to increase. The company is actively promoting geological exploration, reserve filing, and acquisition of mining rights. After obtaining subcoal-based bauxite mining rights, the company can add about 0.116 billion tons of bauxite mining resources. Based on the current market resource price of about 30 yuan/ton, the company's asset value can be increased by about 3.5 billion yuan. The total production capacity of the eight production mines related to the company's application for aluminum mining rights under coal is 6.9 million tons/year. It can make full use of existing mine production facilities for bauxite development. It can save about 2.1 billion yuan in investment compared to building a mine of a corresponding scale. At the same time, production costs can be greatly reduced, and the average mining period of the mine can be extended by more than 10 years. After developing aluminum under coal, it is expected to increase the company's total revenue by more than 2.7 billion yuan and net profit by about 0.46 billion yuan each year.

Investment advice: We expect the company's net profit to be 2.405/2.766/3.755 billion yuan in 2024-2026, corresponding EPS of 0.11/0.12/0.17 yuan/share, respectively, and PE of the stock price on August 7, 2024 to be 10/9/7 times, respectively. Maintain a “Cautious Recommendation” rating.

Risk warning: macroeconomic fluctuations; sharp decline in coking coal prices; transition to new energy sources falls short of expectations, uncertain asset acquisitions, and uncertainty about coal-to-aluminum projects.