Coking coal profits are reshaping the era: it's time to allocate

During the 13th Five-Year Plan period, China's coking coal center was in the 1,000 yuan era for a long time. At that time, low-cost overseas coal and China's steadily growing coking coal production after the supply reform combined to create a weak position for the coking coal sector in the coal-coking steel industry chain. However, since 2021, Australian coal import restrictions and safety inspections have led to the current tight supply and demand for coking coal, and coking coal inventories are far lower than the same period in previous years. As a result, bargaining power and profit distribution in the coking coal sector have increased in the industrial chain, and since then it has entered the 2,000 yuan era. In 2023, Australian coal import restrictions were once again liberalized. Was the logic of redistributing coking coal profits broken? We believe that considering the difficulties of financing increased production in the coal industry under the global ESG process, the current overseas coking coal price is still far higher than China's combined Mongolian coal railway imports and it is still difficult to increase marginal growth in the short term, it is expected that the tight coking coal supply and demand pattern in 2023 will still be difficult to change. At the valuation level, due to expectations of a global recession, the current valuation of the coking coal sector was adjusted to the bottom of history. As of March 31, PE (TTM) was only 6.1 times, and PB (LF) was 1.1 times, making the valuation cost effective ratio outstanding. Therefore, if domestic real estate demand recovers steadily in the later stages, rising steel prices are expected to further make room for higher coking coal prices. The coking coal sector is at the right time.

Jizhong Energy: Hebei's high quality coking coal, outstanding performance elasticity

Jizhong Energy is a high-quality coking coal enterprise in Hebei, with an annual production capacity of 33.85 million tons and a coking coal output of about 12 million tons/year; while the company's quarterly profit increase from 21Q1 to 22Q3 was the highest among major coking coal listed companies. At the best of performance, the quarterly profit (22Q2) was more than 8 times higher than the profit before the current round of coking coal price increases (21Q1), while the quarterly profit of Shanjiao/Pingmei/Panjiang only doubled 2-3 times during the same period. The company's outstanding performance growth was mainly due to a low base, strong price elasticity, and stable demand. The company's 21Q1 profit was only 160 million yuan due to the combined calculation of village fees for the withdrawal of mines in 21Q1; however, thanks to the company's coking long-term cooperative monthly adjustment system (the company's performance was reflected faster in performance compared to seasonal adjustments) and strict cost control, the company's 21Q4 showed excessive performance income compared to other companies, with a profit of 1.37 billion yuan in a single quarter. Furthermore, against the backdrop of a general decline in market prices in 22Q3, the company's quarterly performance remained strong at 1.4 billion yuan. The reason behind this is related to strong downstream demand and strong coking coal prices in the Hebei region where the company is located. If real estate demand improves in the later stages, the rise in coking coal prices in the market is expected to be reflected faster and better in company reports.

Growth still exists, focusing on the main coal industry

From a growth perspective, the company still has room for quantitative growth. According to the listed company, 600,000 tons of Xijing of the Xingtai mine under construction are expected to be put into operation in the second half of 2023. The type of coal is 1/3 coke. At that time, production is expected to increase by 100,000 to 300,000 tons. Furthermore, the 1.5 million ton nuclear capacity increase in the Inner Mongolia mining area in '22 may also increase the company's coal production to a certain extent in '23. At the group level, there are still unlisted coal mines with a production capacity of more than 20 million tons and 10.1 million tons under construction. Looking ahead, the group's mines may become the company's reserve assets and the source of the company's future production capacity growth. Furthermore, the company's investment returns are expected to be strong in '23. In order to moderately focus on the main business and optimize the asset structure, the company sold Jinniu Chemical shares in '22, which is expected to bring excellent investment returns to the company at that time.

High dividends are expected to continue when debt settlement takes place

The company's dividend rate has exceeded 100% in recent years. In addition to being related to the overall stability of the company's capital expenditure and the increase in performance brought about by the central rise in coal prices in recent years, demand from major shareholders to repay debts has also led to an increase in dividends to a certain extent. Dragged down by the Group's early diversified expansion and weak hematopoietic capacity in the non-coal business, the Group's balance ratio reached over 79% in 2021. Although the scale of corporate debt has shrunk in recent years, debt repayment pressure still exists, so the Group's demand for dividends from listed companies will still exist for some time to come. Assuming that the company's dividend rate remains at 80% in 2022, the company's current dividend rate will reach 15% or more.

Risk warning

1. Under economic pressure, downstream demand is uncertain; 2. There is a risk of an unseasonal decline in coal prices due to external factors; 3. Company dividends fall short of expectations; 4. There is a risk that costs will rise unexpectedly; 5. Profit forecasting assumptions are not valid or as risky as expected.