As an independent coking leader, China's Xuyang Group is vigorously developing coking, chemical and hydrogen energy businesses. In 2023, China Xuyang Group's coke ownership, joint venture, operation and management service business volume and trade volume was 15.83 million tons, accounting for 5.08% of the 0.308 billion tons of metallurgical coke products of independent coke companies in China. It is a leading independent coking enterprise. At the same time, the company is also the world's largest coking crude benzene processor and the second largest high-temperature coal tar processor, and has an in-depth layout in the field of hydrogen energy. The company uses coke oven gas as a by-product of the coke production process to produce hydrogen, which has a cost advantage, and is continuously expanding the scale of hydrogen energy production capacity. It is expected to have a hydrogen production capacity of 6 billion cubic meters/year by 2025.

Coking business: The company leverages the advantages of coal blending technology, reduces coal blending costs, and successfully produces low-cost, high-strength, large-block tamped coke. In 2023, China's Xuyang Group coke cost was about 1991 yuan/ton, down 590 yuan/ton year on year, and is at a lower cost level among listed companies that sell more than 2 million tons of coke. Furthermore, the company expanded production capacity through mergers and acquisitions+operation management. Currently, Xuyang Group's coke products have a production capacity of about 21.4 million tons, of which 5.8 million tons of coke production capacity are managed and operated. According to the plan, the company is expected to manage more than 30 million tons of coking in 2025. Currently, it is still 8.6 million tons until the target. In the future, the company can be expected to increase the scale of operation and management and enhance the right to bargain upstream and downstream, and this process will not increase the total domestic coking production capacity. In terms of profit, since the end of May 2024, the coal-coke price gap has widened, and the price spread has gradually widened to 200 yuan/ton. Currently, the coal-coke price difference is gradually being repaired and is showing a trend of strengthening, and profits in the coking industry are expected to gradually recover.

Fine chemical business: Using coke as a starting point, the company has formed three unique chemical industry chains: carbon materials, aromatic hydrocarbons, and alcohol ammonia. In 2023, the company's business volume of carbon materials products reached 1.25 million tons, the business output of aromatic hydrocarbon products was 2.33 million tons, and the business volume of alcoholamine products also reached 1.27 million tons. In 2023, the revenue of the chemical sector surpassed that of the coke sector, and the second-largest pillar industry had significant growth results. The company extends from the coking industry chain to the fine chemical industry, and has a lower cost advantage. For example, methanol is obtained through coking by-product coke oven gas production, and the cost is much lower than other processes. Through continuous extension of the industrial chain, Xuyang Group has achieved a vertically integrated layout, allowing coking and chemical businesses to have a high degree of collaboration, and has taken a leading position in many fine chemical fields, such as industrial naphthalene to phthalic anhydride, coke oven gas to methanol, coking crude benzene processing, and high-temperature coal tar processing.

Hydrogen energy business: The group began developing hydrogen energy business in 2020. High-purity hydrogen production accounted for about 2.3% of the country's market share in 2023, ranking first in the Beijing-Tianjin-Hebei region; the size of the transport fleet continued to expand, with a 110% increase in hydrogen transportation support capacity; Dingzhou, Xingtai and Baoding have built 3 hydrogen fueling stations, and hydrogen energy application scenarios have continued to expand, and a number of hydrogen energy heavy truck transportation routes have been added. More than 60 hydrogen fuel cell vehicles have been added, forming a stable profit model for the entire manufacturing, storage, transportation, and use industry chain A new strong growth engine.

We expect China's Xuyang Group's net profit for 2024-2026 to be 1.03/1.33/1.69 billion yuan, or +19.06%/+29.37%/+27.27%; EPS is 0.23/0.30/0.38 yuan, corresponding to current share price PE 11.8/9.1/7.2 times, and net assets in 2023 corresponding to current stock price PB of 1.0 times. The company's future scale expansion will gain a bargaining advantage. In the context of steady growth, it will restore profits in the “coke and steel” industry chain, create a second growth curve for the chemical business, and have high growth potential in the future. Covered for the first time, giving it a “Highly Recommended” rating.

Risk warning: Risk of coke prices falling beyond expectations, risk of production safety, risk of new production capacity falling short of expectations, risk of global economic fluctuations.