Incidents:

On August 29, 2024, Huaibei Mining released its 2024 semi-annual report: in the first half of 2024, the company achieved operating income of 37.236 billion yuan, a year-on-year decrease of 0.17%; net profit attributable to shareholders of listed companies was 2.935 billion yuan, a year-on-year decrease of 18.19%; net profit attributable to shareholders of listed companies after deduction was 2.887 billion yuan, a decrease of 16.04% year-on-year. Basic earnings per share were $1.13, a year-on-year decrease of 22.07%. The weighted average ROE was 7.27%, down 2.85 percentage points year over year.

On a quarterly basis, in the second quarter of 2024, the company achieved total revenue of 19.95 billion yuan, a year-on-year increase of 8.4%, a year-on-month increase of 14.9%, net profit attributable to shareholders of listed companies of 1.346 billion yuan, a year-on-year decrease of 8.89% and a decrease of 15.4% month-on-month. Net profit attributable to shareholders of listed companies after deduction was 1.322 billion yuan, a decrease of 3.1% year-on-year and a decrease of 15.5% month-on-month.

Investment highlights:

Coal business: Strong cost control ability, less fluctuation in gross profit per ton. In the first half of 2024, the company achieved commercial coal production of 10.3234 million tons, -8.86% year-on-year, commercial coal sales volume of 8.0329 million tons (export caliber, same below), -18.17% year-on-year, the price of commercial coal tonnes of coal was 1144.33 yuan/ton, -10% year-on-year, the cost of a ton of coal was 564.92 yuan/ton, -16% year-on-year, and gross profit of tons of coal reached 579.41 yuan/ton, -3% year-on-year. On a quarterly basis, in the second quarter of 2024, the company achieved commercial coal production of 5.087 million tons, -10% year-on-month, -3% month-on-month, and commercial coal sales of 4.0068 million tons, which was -15% year-on-year, flat. The price of the company's commercial coal tons was 1112.04 yuan/ton, -3% year-on-month, -5% month-on-month. The cost of a ton of coal was 536.99 yuan/ton, -14% year-on-month, -9% month-on-month, and gross profit of tons of coal reached 575.05 yuan/ton, +11% year-on-year and -1% month-on-month. The gross profit margin of the coal business was 52%, an increase of 6 percentage points over the previous year, and an increase of 2 percentage points over the previous month.

Coal chemical business: The extended chain ethanol project has been put into operation and is expected to increase profits. In terms of coke, the company's coke production/sales volume in the first half of 2024 was 1.6983/1.7048 million tons, respectively, and the price of a ton of coke reached 2127 yuan/ton (excluding tax), -15.76% year-on-year; on the methanol side, due to factors such as market conditions and the commissioning and operation of ethanol projects, the subsidiary Carbonxin Technology suspended methanol production. The company's methanol production/export sales volume reached 0.1604/0.1177 million tons, respectively. At 35.24%/-53.09%, the unit price of methanol was 2177.44 yuan/ton (excluding tax), the same as the previous year. In terms of ethanol, the company's 0.6 million ton ethanol project was tested at the end of 2023. It has now produced qualified ethanol products and has reached first-class product standardization. It is expected to become a new profit growth point in the future. In the first half of 2024, the company's ethanol production/sales volume reached 0.0755/0.0636 million tons, respectively, and the unit price of ethanol was 5,397.88 yuan/ton (excluding tax).

On a quarterly basis, in terms of coke, the company's coke production in the second quarter of 2024 was 0.822 million tons, -3.9% year-on-month, -6% month-on-month. Coke sales volume was 0.8414 million tons, +0.3% month-on-month, and the price per ton of coke was 1937.43 yuan/ton (excluding tax), -18% year-on-year and -16% month-on-month.

In terms of methanol, the company's methanol production in the second quarter of 2024 was 0.0699 million tons, -22.2% YoY, -23% month-on-month, methanol sales volume was 0.0364 million tons, -63.5% YoY, -55% month-on-month, and the unit price of methanol was 2209.6 yuan/ton (excluding tax), +7.8% YoY and +2% month-on-month. In terms of ethanol, in the second quarter of 2024, the company produced 0.0755 million tons of ethanol and sold 0.0636 million tons of ethanol. The unit price of ethanol was 5,397.88 yuan/ton (excluding tax).

Recently, there has been a marginal improvement in the supply-demand relationship in the coking coal industry chain. Recently, coking coal and coke prices have continued to fall somewhat. Coke companies are facing losses. Some coking companies have undergone maintenance, and supply has been reduced slightly, but downstream steel prices have rebounded. The industrial chain is showing some positive signs, and the price of coking coal and coke is expected to bottom out.

Profit forecast and valuation: We expect the company to achieve operating income of 70.52/73.9/78.45 billion yuan in 2024-2026, respectively, -4%/+5%/+6% year over year, net profit to mother of 5.2/5.66/6.58 billion yuan, -16%/+9%/+16%; EPS is 1.93/2.10/2.44 yuan, respectively, corresponding to current stock price PE 7.5/6.9/5.9 times. Considering that prices are mainly agreed upon by the company manager, the coal business operation is expected to improve steadily. In the future, the Taohutu mine will contribute to production, new projects in the coal chemical sector will continue, the company can expect room for future growth, and maintain a “buy” rating.

Risk warning: risk of a sharp drop in coal market prices; risk of production safety accidents; risk of coal mine production progress falling short of expectations; risk of coal chemical business falling short of expectations; risk of policy regulation exceeding expectations, etc.