Key points of investment

Incident: On August 7, 2024, the company issued: 1) “Asset Purchase Plan by Issuing Shares” announcement, which intends to purchase 51.0095% of Tianyue Coal's shares held by Xinyi Group at an issue price of 1.29 yuan/share through the issuance of shares, and the corresponding transaction price is tentatively not more than 350 million yuan; 2) “Approval of the 5 billion yuan syndicated loan credit approval for the company's Shaanxi Yihua Mining Development Co., Ltd. and Haizetan Coal Mine Project” announcement, agreeing that SPD Bank will take the lead in providing a syndicated bank to provide the total scale of the Shaanxi Yibai Coal Group More than 5 billion yuan of syndicated loans; 3) the “Progress in Obtaining Mining Rights for Aluminum Projects under Coal” announcement, the company's mines are actively promoting geological exploration, reserve filing and acquisition of mining rights; 4) “Business Performance Forecast for 2025 to 2027” announcement, the net profit to the mother is estimated to be 28 (+24%) /38 (+26%) /58 (+53%) billion yuan in 25/26/27, respectively.

Acquiring high-quality assets consolidated growth, and profitability continued to improve. Tianyue Coal has a production capacity of 0.6 million tons/year and reserves of 3.89 million tons. It mainly produces high-quality coking coal, which is a scarce type of coal in the market. This time, through the issuance of shares, Tianyue Coal's assets were purchased at an issue price of 1.29 yuan/share and a transaction consideration of no more than 0.35 billion yuan, which is higher than the current price of 1.1 yuan (7/24 closing price), demonstrating the company's confidence in future development. Based on Tianyue Coal's average annual net profit of 0.13 billion yuan and transaction price of 0.35 billion yuan after merger, the corresponding PE is 5.14 times, which is lower than the price-earnings ratio and average of companies subject to similar transactions in the past ten years, and the transaction cost performance ratio is outstanding. After the acquisition is completed, the company will hold 63.2571% of Tianyue Coal's shares, increasing its total production capacity to 17.1 million tons (including under construction). Its subsidiary Fengjiatan and Dangdangling mining areas will also be connected to Tianyue Coal Mine. Taking advantage of the geographical and scale advantage of “three consecutive mines”, it is expected to increase net profit by more than 0.16 billion yuan per year.

The Haizetan project loan credit was approved, which is expected to contribute to long-term growth. According to the announcement, SPD Bank, as the lead bank of the syndicate, will provide syndicated loans with a total size of not more than 5 billion yuan for the company's coal mines. The approval of the credit approval marks the substantial restoration of the company's credit and financing functions and further optimization of the financing structure. As a key project for the company to fully achieve the goal of integrated coal and electricity, the Haizetan Coal Mine will be put into operation for the first time in 2026Q2, producing 3 million tons of coal; it will be put into operation in 2027, producing 10 million tons of coal in the same year. According to preliminary estimates of the average coal price in the 2023 market, it can add about 4.4 billion yuan in net profit, and the return on investment of more than 50%. After the project is put into operation, the company's coal and power business is expected to be deepened, and performance may be greatly improved.

Actively promote subcoal-based bauxite mining rights and explore new value in existing assets. As the first batch of mines to obtain sub-coal bauxite mining rights, the 8 production mines related to the application for sub-coal aluminum mining rights totaled 6.9 million tons/year, which can add about 0.116 billion tons of bauxite mining resources to the company. Based on a 60% extraction ratio, the amount that can be extracted is about 69.58 million tons. Based on current production capacity and the amount of resources that can be extracted from bauxite, the average mining period can be extended for more than 10 years. Based on the production cost of aluminum under coal of 300 yuan/ton and the sales price of 450 yuan/ton, it is expected to increase the company's revenue by more than 2.7 billion yuan and net profit by about 0.46 billion yuan.

Profit forecasting and investment ratings: As the company's key projects progress steadily, the company's performance is expected to improve year by year.

We expect the company's total revenue for 2024-2026 to be 31.7/33.3/37.5 billion yuan, and net profit to mother will be 2.49/2.82/3.8 billion yuan respectively. The PE corresponding to the closing price on July 24 before the suspension of trading will be 9.81/8.66/ 6.44 times, respectively, maintaining the company's “buy” rating.

Risk warning: 1) The decline in coal prices exceeded expectations; 2) Domestic economic recovery fell short of expectations; 3) The use of capital investment in infrastructure fixed assets fell short of expectations