The decline in coal prices dragged down the year-on-year decline in profits, and mid-term dividends were announced

1H24 Shaanxi coal industry achieved net profit of 10.56 billion yuan, a year-on-year decrease of 8.8%, after deducting non-return net profit of 11.18 billion yuan, a year-on-year decrease of 18%. The decline in profits may be mainly dragged down by the decline in coal prices in the market. In the first half of the year, the price of 5,500 kilocalories of thermal coal in Beigang fell 14.4% year on year, and the annual Changxie price also fell slightly by 2.4% year on year. The company announced an interim cash dividend of 0.109 yuan per share, accounting for 10% of the semi-annual earnings of 1.09 yuan per share. The company promises to distribute no less than 60% of that year's distributable profits in cash in 2022/24, and the high dividend ratio is expected to continue. To maintain the “purchase”, we expect the company's 2024-26E net profit to be 23.48/25.61/27.41 billion yuan. Considering that the company's dividend payout rate in 2021-2023 will be stable at about 60%, which is higher than the average payout rate of comparable companies, the average PE of industry comparable companies in 2024E will be 8.9 times, giving the company 12.7 x 2024E PE, corresponding to the target price of 30.7 yuan.

1H24 Self-produced coal production and sales remained stable, and costs declined year-on-year

The company achieved coal production of 86.41 million tons in the first half of the year, up 2.8% year on year. Among them, the main production area, the northern Shaanxi mining area, achieved output of 55.75 million tons, an increase of 1.6% year on year. Capacity utilization in the Binhuang mining area, another major production area, recovered and achieved high year-on-year growth. Coal production increased 8.4% year on year to 26.17 million tons.

In the first half of the year, the company achieved coal sales of 0.13 billion tons, an increase of 2.3% over the previous year. Of these, sales of self-produced coal were 83.39 million tons, a slight increase of 0.7% over the previous year, and the production and sales ratio remained stable. The average price of coal sales in the first half of the year was affected by the decline in coal prices in the market, falling 11.3% to 575 yuan/ton. In terms of cost, the company continued to focus on cost control. The full cost of the original coal preparation unit fell 5.5% to 281 yuan/ton year on year, and the cost per ton in addition to taxes was reduced by 10.5 yuan. Strict cost control during the decline in coal prices also helped the company reduce the downward pressure on profits.

The increase in production and sales partially hedged the impact of the decline in coal prices. The 2Q24 profit improvement was followed by the month-on-month increase in production and sales, and the company's quarterly profit improved month-on-month. 2Q24 achieved coal production of 44.95 million tons, an increase of 8.4% over the previous month, and achieved coal sales of 70.08 million tons, an increase of 14% over the previous month. Among them, self-produced coal sales were 42.48 million tons, an increase of 3.8% over the previous month, and production and sales fell slightly by 4.2 pct to 94.5% from the previous month. In the second quarter, the average quarterly price of 5,500 kcal thermal coal fell 7.4% to 852 yuan/ton due to hydropower output exceeding expectations and maintaining a high growth rate of imported coal. However, the month-on-month increase in production and sales led to a month-on-month increase in the company's operating income. The company achieved revenue of 44.3 billion yuan in the second quarter, an increase of 9.5% month-on-month, compounded by changes in fair value and improvements in investment income. The company achieved net profit of 5.9 billion yuan month-on-month in the second quarter.

Risk warning: supply-side disturbances exceeded expectations; downstream demand recovery exceeded expectations.