Introduction to this report:

Production declined in the first half of the year due to the impact of the “Third Super League”. The performance fell short of expectations. It is expected that Q3 production and sales will return to the same period year on year. The period of maximum production and sales pressure for the whole year has passed.

Key points of investment:

Investment advice: The company announced its 2024 interim report, achieving operating income of 17.654 billion yuan/ -19.33%; net profit to mother of 2.227 billion yuan/ -57.96%. Among them, Q2 revenue was 8.995 billion yuan/ -9.96%; net profit to mother was 0.939 billion yuan/ -50.99%, lower than market expectations. The 24-26 EPS was lowered to 1.67/2.09/2.55 (-0.62/-0.50/-0.37), and according to the comparable company's 2024 10.48x PE, the target price was lowered to 17.51 (-8.38) yuan to maintain the “gain” rating.

2024Q2 production recovered significantly from month to month, and production and sales are expected to return to the same period in Q3 year on year. In the first half of the year, the company produced 27.67 million tons of raw coal (of which 13.77 million tons of mixed coal and 13.85 million tons of mixed coal; 9.7 million tons of injected coal and 9.36 million tons of injected coal), a year-on-year decrease of 6.3%, and commercial coal sales were 24.55 million tons, a year-on-year decrease of 10%. Among them, commercial coal production was 14.43 million tons in Q2, and the year-on-year decline was significantly reduced to -3% compared to 10% in Q1; commercial coal sales were 12.74 million tons, a year-on-year decrease of 13%. In mid-May, Shanxi Province emphasized that enterprises across the province had begun to “increase production”. In June alone, coal production in Shanxi Province had recovered to 0.114 billion tons, reaching the monthly average for 2023, and production had returned to normal. We expect the company's production and sales to gradually return to normal starting in late May. It is expected that sales volume will remain flat or start growing in Q3. The moment of greatest pressure on the company's production and sales has passed.

The cost side became the core factor affecting profit in Q2. The average sales price of 2024H1 was 683 yuan/ton, down nearly 90 yuan/ton year on year; however, starting in Q2, the year-on-year pressure was not great. The average sales price for industry and commerce in 24Q2 was 677 yuan/ton, down only 3 yuan/ton year on year. However, due to the increase in costs and the decline in production and sales brought about by the “top three” management, there was an increase on the company's cost side. Q2 increased 44 yuan/ton value by 365 yuan/ton over the same period last year, which became the most important factor in suppressing profits in Q2. The company's gross profit in Q2 was 312 yuan/ton, a year-on-year decrease of 46.5 yuan/ton. With the full restoration of average monthly production in Shanxi in June, the cost side of Q3 is expected to return to normal after the company's production and sales are normal. However, considering the high base of the 23Q3 price increase (728 yuan/ton), it is expected that the year-on-year pressure on the profit side may be limited.

Increased resource taxes and asset depreciation are also hampering performance. Beginning on April 1 of this year, the raw ore tax rate in the Shanxi coal resource tax rate was adjusted from 8% to 10%, and the mineral processing tax rate was adjusted from 6.5% to 9%; Q2 taxes and additional items increased by nearly 0.25 billion to 0.996 billion compared to Q1 in a single quarter. Furthermore, the company currently has a coke production capacity of 1.4 million tons. Although the coke industry began to increase prices and reduce losses in Q2, it is expected that profits will still be hampered.

Risk warning: macroeconomic growth falls short of expectations, production safety risks, large-scale import releases