Incident: On January 30, 2024, Lu'an Huanneng released its 2024 three-quarter report. In the first three quarters of 2024, the company achieved operating income of 26.649 billion yuan, a year-on-year decrease of 19.28%, and realized net profit of 2.798 billion yuan, a year-on-year decrease of 61.51%; net profit after deduction was 2.821 billion yuan, a year-on-year decrease of 61.05%.

Net cash flow from operating activities was $3.733 billion, down 59.78% year on year; basic earnings per share were 0.94 yuan/share, down 61.32% year on year. The balance ratio was 47.15%, up 4 pcts from the full year of last year.

In the third quarter of 2023, the company's revenue for a single quarter was 8.995 billion yuan, down 19.19% year on year, which was basically the same; net profit for the single quarter was 0.572 billion yuan, down 71.03% year on year and 39.09% month on month; net profit after deduction for the single quarter was 0.572 billion yuan, down 71.03% year on year and 40.70% month on month.

Comment:

The decline in volume and price affected performance, and coal production and sales continued to improve month-on-month. The company's raw coal production in the first three quarters of 2024 was 42.47 million tons, down 2.15 million tons (-4.82%) year on year; among them, raw coal production in the third quarter was 14.8 million tons, down 0.28 million tons (-1.86%) year on year, up 0.37 million tons (+2.56%) month on month. The company's commercial coal sales in the first three quarters of 2024 were 38.07 million tons, down 2.34 million tons (-5.79%) year on year; among them, commercial coal sales in the third quarter were 13.52 million tons, up 0.4 million tons (+3.05%) year on year, up 0.78 million tons (+6.12%) month on month. Affected by the sharp drop in commercial coal prices, the company sold 662 yuan/ton in the first three quarters of 2024, down 93 yuan/ton (-12.32%) from 755 yuan/ton in the same period last year. Affected by the decline in coal production and sales, etc., the company's cost per ton of coal in the first three quarters of 2024 was 376 yuan/ton, up 33 yuan/ton (9.55%) from 343 yuan/ton in the same period last year. Overall, the company's coal prices and production declined year on year. Combined with rising cost of tons of coal against the backdrop of falling production, the company's coal business performance declined. The gross profit margin of the coal business in the first three quarters of 2024 was 43.2%, down 11.34pct from 54.54% in the same period last year. However, it is important to note that the company's coal production and sales have gradually rebounded since the first quarter, and there is a significant month-on-month improvement in the third quarter. The company's annual production and sales volume will remain flat or even slightly increase year on year.

The company continues to strategically expand resources to make up for the shortcomings in the lifetime of existing mines. The company adheres to the development principle, accelerates resource expansion, project construction, technological transformation, mergers and acquisitions, industrial expansion and product upgrading, promotes the expansion of the scale of the coal coke industry, the improvement of industrial quality, product structure optimization, and overall improvement of development strength. In accordance with the principle of “being able to compete and get everything”, focus on market-based bidding for finished resources such as Shanghai and Xiying and expansion resources such as Wuyang and Houbao, and take appropriate opportunities to promote the injection of coal assets by controlling shareholders. It should be noted that as of the 2024 mid-year report, the company has four mines under construction, including Jing'an Coal, Xinyu Coal, Houbao Coal, and Yuxin Coal, with a total production capacity of 3 million tons/year, and a planned mine with Yuanfeng Mining 3 million tons/year. Furthermore, in August 2024, the company announced that it would eventually bid for coal prospecting rights in the Shangma block of Xiangyuan County, Shanxi Province for 12.126 billion yuan, with 819.575 million tons of coal resources. The deal still needs to sign a “Transaction Confirmation” with the Shanxi Provincial Department of Natural Resources. The successive commissioning of future mines under construction and proposed construction and the development of new resources will help enhance the company's core service functions and core competitive advantages, as well as the company's sustainable and steady development in the future.

Net cash & high dividends highlight the company's investment value. In 2023, the company responded positively to the national policy direction of “improving the quality and investment value of listed companies”, and actively echoed the Shanghai Stock Exchange's call for action to “improve quality, efficiency and return”, and actively responded to investors' reasonable demands for cash dividends. The ratio of the company's cash dividends to the net profit attributable to common shareholders of listed companies in the consolidated statements was still 60%. The amount of cash dividends (including tax) was 4.753 billion yuan, with dividends of 15.89 yuan per 10 shares, reflecting the company's “good shareholder” concept. In addition, it should be noted that as of the three-quarter report of 2024, the company's monetary capital was 23.065 billion yuan, interest-bearing debt was 4.118 billion yuan, and the cash coverage ratio for interest-bearing debt reached 560%, reflecting the company's excellent asset quality and sound business philosophy.

Profit forecast and investment rating: We believe that Lu'an Huanneng is a leader in the domestic coal injection industry. It has excellent coal assets, high cash coverage of interest-bearing debt, compounded endogenous epitaxial growth in production capacity and high dividends. The company operates steadily while also having high growth potential. We expect the company's net profit for 2024-2026 to be 3.664 billion, 4.646 billion, 5.906 billion, EPS 1.22/1.55/ 1.97 yuan/share, respectively; as of October 30, the 2024-2026 PE will be 12.53/9.88/7.77 times; we are optimistic about the company's revenue space and maintain the company's “buy” rating.

Risk factors: Domestic macroeconomic growth falls short of expectations; risk of production safety; risk of production fluctuations.