Incident: Shanxi Coking Coal released its 2024 semi-annual report: In the first half of 2024, the company achieved operating income of 21.57 billion yuan, a year-on-year decrease of 21.73%; net profit to mother was 1.966 billion yuan, a year-on-year decrease of 56.47%; net profit after deduction was 1.88 billion yuan, a year-on-year decrease of 58.66%. Basic earnings per share were 0.3463 yuan/share, a year-on-year decrease of 58.90%. The weighted average return on net assets was 5.06%, a year-on-year decrease of 9.22pct.

On a quarterly basis, in the second quarter of 2024, the company achieved operating income of 11.018 billion yuan, an increase of 4.42% over the previous year, a year-on-year decrease of 13.97%; realized net profit to mother of 1.016 billion yuan, an increase of 6.93% over the previous year, a decrease of 50.37%; and realized net profit to mother after deduction of 0.983 billion yuan, an increase of 9.71% over the previous year, a year-on-year decrease of 52.15%.

Comment:

The cost of the coal business fell year on year, and gross margin declined. According to the company's 2024 semi-annual report, during the reporting period, some of the company's mines were shut down and production was limited due to safety incidents and other factors. Production and sales of coal products declined year on year. At the same time, the company's coal sector profit declined year on year due to reasons such as a year-on-year decline in the comprehensive sales price of commercial coal and an increase in the tax rate on coal resources. According to Wind data, the average pit price of Gujiao No. 2 coking coal in Taiyuan in the first half of 2024 was 995 yuan/ton (-10.63% year over year). In the first half of 2024, the company's coal business sales revenue was 12.014 billion yuan (-30.01% year over year), sales cost was 5.497 billion yuan (-7.59% year over year), gross profit margin was 6.516 billion yuan (-41.91% year on year), and gross profit margin was 54.24% (down 11.10pct year on year).

The gross profit of the coke business recovered year over year, and costs decreased year over year. According to the company's 2024 semi-annual report, the sales revenue of the coke business for the first half of 2024 was 4.786 billion yuan (-8.27% year over year), sales cost was 4.758 billion yuan (-8.89% year over year), gross profit was 0.029 billion yuan (+918.57% year over year), and gross margin was 0.60% (+0.67 pct year on year).

Electricity and heat business costs declined year on year, and gross margin declined. According to the company's 2024 semi-annual report, electricity and heat sales revenue for the first half of 2024 was 3.319 billion yuan (-6.16% YoY), sales cost was 3.293 billion yuan (-5.96% YoY), the gross profit of the company's electricity and thermal products was 0.026 billion yuan (-26.61% YoY), and the gross margin was 0.78% (YoY decrease 0.22pct).

Production resumed at the Shaqu No. 1 coal mine, and the production side continued to recover. On April 8, 2024, according to the company's “Notice Concerning the Resumption of Production at the Shaqu No. 1 Coal Mine of Huajin Coking Coal Co., Ltd.”, the Shaqu No. 1 coal mine will resume production in an orderly manner from now on in accordance with the requirements. The Shaqu No. 1 coal mine has an approved annual production capacity of 4.5 million tons, accounting for 9.20% of the company's total production capacity. According to the company's preliminary statistics, the Shaqu No. 1 coal mine stopped production for a total of 117 days due to the accident, which is expected to affect raw coal production by about 1.4 million tons.

Profit forecasting and investment advice. We recommend coking coal from Shanxi based on the following three aspects: 1) The company is located at the Jinzhong base, which has rich resource reserves and obvious location advantages. 2) The coking coal produced by the company has the advantages of low ash content, low sulfur content, good coking properties, etc., and has strong scarce resources. 3) The company's dividend ratio is high, and shareholder returns are impressive.

We expect that in 2024-2026, the company will achieve operating income of 42.961 billion yuan, 45.444 billion yuan, 48.728 billion yuan, net profit to mother of 4.084 billion yuan, 4.455 billion yuan, 4.82 billion yuan, EPS (diluted) 0.72 yuan, 0.78 yuan, 0.85 yuan, corresponding PE 10.6x/9.8x with a closing price of 7.66 yuan/share on August 27, 2024 /9.0x, maintain the “Overweight” rating.

Risk warning: Production safety accidents occurred in key coal mines, coal prices fell beyond expectations, safety and environmental protection policies became stricter, and downstream demand fell short of expectations.