Key points of investment:

The company is a high-quality coking coal producer in East China. By the end of 2023, the company had 4.522 billion tons of coal resources and 2.046 billion tons of recoverable reserves. Among them, coking coal reserves such as coking coal, fertilizer coal, and lean coal accounted for more than 70% of the company's total reserves. By the end of June '24, the company had 17 pairs of production mines, with an approved coal production capacity of 35.85 million tons/year and an equity production capacity of 33.47 million tons/year. In addition, the company has 5 thermal coal processing plants, with a washing capacity of 10.5 million tons/year; 4 coking coal processing plants, with a washing capacity of 29 million tons/year. The company's coal quality has the characteristics of low sulfur, very low phosphorus, medium volatility, strong adhesiveness and good coking properties. Relying on the advantages of coal type endowments, the company has formed a product strategy with coking refined coal as the main focus and thermal coal as a supplement. Since 2021, the yield of refined coal has remained around 50%, and the market recognition is high.

The East China region's coking coal supply and demand are mismatched, and the competitive advantage of location is prominent. In 2023, East China's coking coal production accounted for 15.21% of the country's coking coal production, while East China's pig iron production accounted for 30.35% of the country's pig iron production. The mismatch between supply and demand made coking coal resources scarce in the region. The company's coal quality is good, and it is close to the place of consumption. The share of coking coal medium and long-term cooperation contracts has increased to more than 90%. At the same time, downstream customers have strong stickiness and high price stability, so the sales price of the company's coal products is higher than the industry average. The average sales prices of 2022, 2023 and 24H1 companies were 1,160, 1,160, and 1,144 yuan/ton respectively, which is higher than that of comparable companies in most industries. Combined with good cost control, gross margins were 49.3% and 48.9% respectively in the first half of 2024. In the first half of 2024, under pressure and falling coal prices, the gross margin of the company's coal business reached 50.6%, ranking second in the industry, with a clear competitive advantage.

The ethanol project has been put into operation, and after the Taohutu coal mine, 2*0.66 million kilowatt power plant and additional production capacity for gravel aggregates are completed, it will create a new profit growth point. The company's 0.6 million ton anhydrous ethanol project has reached production and is expected to gradually contribute to profits. The Taohutu coal mine is expected to be completed by the end of '25. The 2*0.66 million kilowatt thermal power plant is expected to be combined with coal power after completion at the end of 25. After the power plant is put into operation, it is expected to generate revenue of 2.987 billion yuan and gross profit of about 0.64 billion yuan. Furthermore, it is estimated that after the five mines are put into operation by the end of '24, the gravel aggregate business will add an annual production capacity of 17.62 million tons, and the total production capacity will reach 28.1 million tons/year, which is expected to bring the company about 0.701 billion yuan in revenue and 349 million yuan in gross profit.

The amount of dividends has increased steadily in recent years. In 2018-2020, the company's profit level fluctuated slightly, but the dividend amount increased from 1.086 billion yuan to 1.486 billion yuan; in 2023, even though the company's performance declined year-on-year, the dividend amount was still higher than in 2022. Assuming that the dividend amount in 2024 remains the same as in 2023, at 2.693 billion yuan, and the dividend per share is about 1 yuan. Based on our model's estimated 24-year performance of 5.259 billion yuan, the company's dividend rate will be as high as 51.21%. Referring to the closing price on September 27, the company's dividend ratio will be as high as 6.06%.

Investment analysis: Since the company is located in East China, resources are scarce in the region, and the company's performance is expected to remain high when coal prices remain high within 3-5 years. We expect the company's EPS to be 1.95, 2.12, and 2.32 yuan in 24-26; the corresponding PE will be 8.4 times, 7.8 times, and 7.1 times, respectively. Analyzed from a relative valuation perspective, with the six A-share coking coal companies Shanxi Coking Coal, Shanxi Coking, Pingmei Co., Lu'an Huaneng, Jizhong Energy, and Huayang Co., Ltd. as targets, the average PE valuation of comparable companies from 24 to 26 was 10.7 times, 8.6 times, and 7.3 times. Since the company's Taohutu coal mine is expected to be completed by the end of 25; the 2*0.66 million kilowatt power plant is expected to be completed by the end of 25; the 0.6 million-ton anhydrous ethanol project has reached production and is expected to gradually contribute profits; and 5 gravel aggregate mines are also expected to be completed by the end of 24, and the company is one of the few companies in the industry that still has large capacity growth, so we gave the company a “buy” rating.

Risk warning: The macroeconomy is declining, demand for coal is falling, and the price of the company's coal products is falling. The construction progress of the project under construction fell far short of expectations.