High-quality coking coal leading group capacity expansion is imminent, the first coverage to give a "neutral" rating is optimistic about Jiutai Bangda as a leading private coking coal production enterprise in southwest China. Since the listing of the HKEx in 2018, in the supply-side reform environment, the company has bucked the trend to achieve capacity expansion and fulfilled its pre-listing commitments to investors. Over the next two years, the company will benefit from the structural benefits of the shortage of imported coking coal caused by geopolitical conflicts between China and Australia and the commissioning of new large coke ovens downstream. It is estimated that the company's net profit will be 4.3%, 92%, 1.69 billion yuan, respectively, in 2022, an increase of 97%, 113% and 85%, respectively. The EPS is 0.27, 0.57 and 1.06, respectively, and the dynamic PE is 33.7x/15.8x/8.6x, respectively. Covered for the first time, given a "neutral" rating, with a target price of HK $12.0.

Jiutai Bangda Energy is located in Panzhou City, Guizhou Province. The Group uses mechanized mining and operates three underground coal mines, namely Hongguo Coal Mine, Baogushan Coal Mine and Xiejiahegou Coal Mine, which mainly produces 1x3 coking coal for downstream coke smelting. At the same time, coal and peat are produced as by-products. As of June 30, 2020, the three subordinate coal mines have a total of 29 million tons of JORC certified proven resources and 49 million tons of controlled resources. The coal storage condition of Panzhou coalfield where the company coal mine is located is excellent and stable, with many integrated coalfields and large scale, which is convenient for cluster development, and the mining cost is relatively low. At the same time, the company's coal mining mechanization is high, through the integration of mining, coal washing, transportation processes, the company leads the industry in coal mining profits. In 2019, the profit per ton of coal reached 503 yuan per ton, far exceeding the major coking coal production listed companies. Benefiting from the pick-up in coking coal prices in 2020, the company's profit per ton of coal will be higher than in previous years. Looking back in the first half of 2020, due to the increase in production capacity of Hongguo Coal Mine and Baogushan Coal Mine and the acquisition of Xiejiahegou Coal Mine, the company recorded operating income of 630 million yuan in the first half of this year, an increase of 63.6% over the same period last year. The net profit reached 150 million yuan, an increase of 29% over the same period last year.

Looking ahead, the main growth points of the company will come from:

1) capacity expansion of existing coking coal mines and potential acquisition and integration of regional coking coal mines. After listing, the company expanded the production capacity of Hongguo and Baogushan Coal Mine from 450000 tons to 600000 tons respectively. The production capacity of Hongguo Coal Mine and Baogushan Coal Mine is expected to expand to 1 200000 tons and 900000 tons respectively in 2021. In addition, with abundant cash flow and healthy balance sheet, the company is expected to acquire and integrate coal mines in the region. 2) the increase of supply in coking coal industry is limited, but the demand picks up rapidly. Due to the supply-side reform, the production of domestic coking coal mines is restricted in the short term. At the same time, the new coking equipment is mainly large coke ovens, which increases the demand for high-quality and low-sulfur coking coal. Coking coal has a high degree of external dependence, and it is difficult to ease the geopolitical contradictions between China and Australia in the short term. A number of positive superposition, Shanxi main coking coal prices hit bottom and rebound 28%, coking coal prices will continue to strengthen, good for the domestic leading high-quality coking coal suppliers.

Structural shortage of coking coal is good for high quality coking coal faucet

In terms of reserves, coking coal accounts for 24% of China's total coal reserves. Compared with thermal coal, coking coal is a scarce resource. Coking coal is used to smelt coke, and downstream independent coking plants and steel mills account for 65% and 35% of the demand.

From the demand side, the coking industry in the lower reaches of the first half of the year was first affected by the epidemic, and then interfered by factors such as "capacity removal", "production restriction by environmental protection", "production determined by coal" and other factors, and the demand for coking coal was suppressed. In the second half of the year, with the resumption of production after the epidemic and the impact of the production of large-scale coke ovens with capacity loss and high efficiency, coke prices took the lead in the recovery, which led to a rebound in coking coal prices.

From the supply side, the stock supply of domestic coking coal is stable and the increment is limited. Statistics show that among the more than 200 newly approved coal mines from January to October, there are only 9 coking coal mines, which do not match the reserves and output of coking coal seriously. It takes 2 years from approval to commissioning of coking coal mine, so it can be inferred that the overall production potential of coking coal mine is small in the medium and long term, or it is facing the predicament of insufficient supply according to the data of short-term coking coal mine construction.

In terms of imports, from January to October this year, China imported a total of 65.27 million tons of coking coal. Australia and Mongolia are the main importers, accounting for 54% and 30% respectively. Affected by the epidemic, imports of coking coal from outer Mongolia decreased by 30% compared with the same period last year. Australian coking coal, on the other hand, was affected by tensions in Sino-Australian relations in October, and the import volume was restricted by policy, resulting in a structural shortage in the market, further pushing up domestic coking coal prices. Shanxi benchmark coking coal prices have rebounded 28% from their May low.

Value the company as a leading enterprise of high-quality coking coal. The high-quality coking coal produced by the company's coal mine has the characteristics of low ash, low sulfur and high bonding, which is a scarce resource, which is a powerful supplement to the policy shortage of imported high-quality coking coal. After the supply-side reform, the new large coke ovens have high requirements for coal, which will further push up the demand for high-quality coking coal. Therefore, the demand growth of high-quality coking coal will exceed the overall coking coal market. In addition to the restrictive policy on the import of coking coal, with the deepening of supply-side reform, after the removal of production capacity, the protective policy for domestic coal enterprises is also worthy of attention. Recently, the Coal Law (draft for soliciting opinions) clearly points out the supply orientation of imported coal as a supplement to the domestic market. The policy end is good for domestic coking coal enterprises in the medium and long term.