Incident: Lu'an Huanneng released the 2024 semi-annual report: In the first half of 2024, the company achieved operating income of 17.654 billion yuan, a year-on-year decrease of 19.33%, net profit to mother was 2.227 billion yuan, a year-on-year decrease of 57.96%, and net profit to mother after deduction was 2.249 billion yuan, a year-on-year decrease of 57.31%. Basic earnings per share were 0.74 yuan, a year-on-year decrease of 58.19%, and the weighted average return on net assets was 4.53%, a year-on-year decrease of 5.77pct.

In the second quarter of 2024, the company achieved total operating income of 8.995 billion yuan, a year-on-year decrease of 9.96%, a month-on-month increase of 3.88%, net profit of 0.939 billion yuan, a year-on-year decrease of 50.99% and -27.11% month-on-month; net profit after deducting non-return to mother of 0.964 billion yuan, a year-on-year decrease of 49.55% and a decrease of 24.94% month-on-month.

Comment:

The company's coal production and sales rebounded month-on-month in 24Q2, and gross profit per ton of coal remained stable from quarter to quarter. 1) Production and sales volume: According to the company's 2024 semi-annual report, in the first half of 2024, the company produced 27.67 million tons of raw coal (-6.33% YoY), sold 24.55 million tons of commercial coal (-9.51% YoY), and produced 14.43 million tons of raw coal in the second quarter (-2.76% YoY, +8.99% YoY); commercial coal sales in the second quarter were 12.74 million tons (-11.65% YoY, +7.87% YoY). 2) Price and cost: The average sales price of the company's coal in the first half of 2024 was 683.09 yuan/ton (-11.59%), and the average sales price of the company's coal in the second quarter was 677.23 yuan/ton (-1.52% YoY, -1.77% YoY). The average sales cost of the company's coal in the first half of 2024 was 371.41 yuan/ton (+10.06% year over year), and the average sales cost of coal in the second quarter was 365.49 yuan/ton (+12.29% year over year, -3.26% month over month). 3) Profit: In the first half of 2024, the company's gross profit per ton of coal was 311.69 yuan/ton (-28.38% year on year), and gross profit per ton of coal in the second quarter was 311.74 yuan/ton (-13.93% year on year, +0.03% month on month).

Overall, in the first half of 2024, the company's coal business achieved operating income of 16.77 billion yuan (-20.00% YoY), operating costs of 9.118 billion yuan (-0.41% YoY), gross profit of 7.652 billion yuan (YoY -35.19%), and gross margin of 45.63% (year-on-year decrease of 10.70 pct).

The company competed for coal prospecting rights in the Shangma block of Xiangyuan County, Shanxi Province to increase coal resource reserves. According to the company's announcement, on August 21, 2024, the company participated in the listing sale of coal prospecting rights in the Shangma block of Xiangyuan County, Shanxi Province, and competed for the coal prospecting rights at RMB 12.126 billion. The exploration area of coal prospecting rights in the Shangma block of Xiangyuan County, Shanxi Province is 72.4173 square kilometers, and the amount of coal resources is about 0.82 billion tons.

Profit forecasting and investment advice. We recommend Lu'an Huanneng based on the following three aspects: 1) The company is the only national high-tech enterprise in the coal industry, and intelligent mine construction is at the forefront of the industry. 2) The company has strong competitiveness and outstanding share in the coal market. 3) The company has a relatively high share of coal in the market, and its performance is more flexible, and it is expected to benefit from the rebound in coking coal prices. We expect that in 2024-2026, the company will achieve operating income of 35.571 billion yuan, 37.242 billion yuan, 39.016 billion yuan, net profit to mother of 4.562 billion yuan, 4.631 billion yuan, 4.883 billion yuan, EPS (diluted) of 1.52 yuan, 1.55 yuan, and 1.63 yuan, corresponding to PE 9.3x/9.2x with a closing price of 14.21 yuan on August 22, 2024 /8.7x, maintain the “Overweight” rating.

Risk warning: safety, environmental protection and energy saving risks, systematic decline in coal prices, downstream demand falling short of expectations, project progress falling short of expectations