Incident: The company achieved operating income of 21.57 billion yuan in the first half of 2024, or -21.73% year-on-year; realized net profit to mother of 1.97 billion yuan, or -56.47% year-on-year. In the second quarter of 2024, revenue was 11.02 billion yuan, -13.97% YoY; net profit to mother was 1.02 billion yuan, or -50.37% YoY.

Profits declined due to safety restrictions affecting the company's production and sales. In 2024, when imported coal exceeded expectations and demand was limited, coal prices declined to a certain extent. At the same time, due to accidents and production restrictions, the company's production and sales also declined. In 2024, H1's coal sector revenue was 12.01 billion yuan, or -30.01% YoY; gross profit was 6.52 billion yuan, or -41.91% YoY. Non-coal business: 2024H1 achieved revenue of 3.32 billion yuan from electricity and thermal power, -6.16%% year on year, gross profit of 25.78 million yuan, or -26.61% year on year; the coke sector achieved revenue of 4.79 billion yuan, -8.27% year on year, gross profit of 28.83 million yuan, reversing the year-on-year loss.

The bottom of coking coal has been discovered, and the company's performance is expected to pick up in the second half of the year. On August 23, 2024, the closing price of coking coal futures reached the lowest price of 1,314 yuan/ton during the year, then began to rebound. As of August 29, it was 1,387 yuan/ton. We believe that the bottom of the coking coal futures price has remained unchanged in the third quarter. We believe that the company's coking coal price resilience is showing. Coupled with the resumption of production at Shaqu Mine and the resumption of night work, the company's performance is expected to pick up in the second half of the year.

High dividends+asset injection expectations highlight the value of the investment. In 2023, the company's dividend ratio reached 67.07%, and for three consecutive years, the dividend ratio was greater than 60%. Furthermore, according to the “Letter of Commitment to Avoiding Competition in the Industry” issued by the Coking Coal Group, it is promised to inject eligible coking coal mines with a remaining extractable period of not less than 10 years and an approved production capacity of not less than 0.9 million tons/year into listed companies. The company can be expected to grow in the future.

We expect net profit to be 4.67/5.46/5.99 billion yuan in 2024-2026, or -31.07%/+17.06%/+9.61%, EPS of 0.82/0.96/1.05 yuan; PE corresponding to the stock price on August 29, 2024 is 9.62/8.22/7.50 times. As “Gold Nine Silver Ten” enters the peak construction season, profits in the coking steel industry chain are expected to recover, and coking coal prices are expected to pick up. At the same time, with the injection of the Group's coal coke assets, the company's potential for extended growth can be expected. The high dividend further highlights the company's investment value and gives Shanxi coking coal a “highly recommended” rating.

Risk warning: Economic growth fell short of expectations; coal prices fell sharply; asset injection progress fell short of expectations.