Investment summary

An international energy group with a global perspective, and production capacity continues to expand. Yankuang Energy relies on Shandong Energy Group, with coal mining as its main business, and the development of the entire industry chain takes into account the downstream coal chemical industry. Having set up overseas coal business in 2004, it has now formed three major energy bases in Shaanxi, Mongolia, Shandong headquarters, and Australia, and has become an international energy group with international and domestic wings. By the end of '23, the company's coal production capacity was 0.231 billion tons/year. The company's past three years of epitaxial mergers and acquisitions have combined endogenous growth, and production capacity has continued to expand. After the completion of Wanfu Coal Mine (1.8 million tons/year) and Wucaiwan Coal Mine (10 million tons/year) in 2024-2025, we expect to add a total approved production capacity of 11.8 million tons. At that time, the company's approved production capacity will be 0.242 billion tons/year. In addition, Shandong Energy Group also has a direct production capacity of 0.093 billion tons. According to the “Development Strategy Outline” formulated by Yankuang Energy, it is planned to increase coal production to 0.3 billion tons/year within the next 5-10 years. We believe that in the future, coal assets directly under Shandong Energy Group are expected to continue to be injected into listed companies.

With scarce overseas coal resources, it has been cultivated for many years and has now entered a new stage of high-quality development. In 2023, Yancoal Australia (including Yancoal International) achieved a total of 38.86 million tons of commercial coal production, accounting for 29% of Yankuang Energy Group's production. Yankuang Energy is also the only listed domestic coal company with large overseas coal mine assets, and its scarcity is prominent. As Australia's third-largest coal company and largest franchised coal producer, Yanao is a high-quality core asset for the Australian coal industry. Since 2004, Yankuang Energy has been developing in Australia for many years, and has successively acquired high-quality main mines such as Moraben, Walker Mountain, and Hunter Valley. In 2012, Yancoal Australia was listed on the Australian Stock Exchange, and in 2018, it was listed on the Hong Kong Stock Exchange. In 2023, Yancoal Australia achieved main business revenue of 7.783 billion Australian dollars and realized net profit of 1.831 billion Australian dollars after deduction.

With the integrated development of the industrial chain, profits in the coal chemical sector are expected to bottom up. The company relies on its own coal resources to develop the coal chemical sector downward. It has multiple complete coal chemical industry chains such as coal gasification and coal liquefaction. The production capacity of some chemicals ranks among the highest in the country. Compared with other chemical companies that need to buy coal from outside, it has a strong raw material cost advantage. We expect the company's coal chemical sector profits to recover in '24. Benefiting from improvements in the industry's supply and demand pattern, coal chemical business profits are expected to bottom out and rebound.

A minimum cash dividend dividend is promised, and stable operation and high dividends highlight allocation value. The company promises that the total cash dividend distributed by the company in 23-25 should account for about 60% of net profit after deducting statutory reserves, and that the cash dividend per share shall not be less than RMB 0.5. Furthermore, according to the company's “2023 Equity Distribution Implementation Notice” of June 28, 2024, a cash dividend of 1.49 yuan (tax included) was distributed per share, and 0.3 bonus shares were distributed per share. The total cash dividend amount reached 11.507 billion yuan, and the A-share dividend rate reached 57%. The company currently has abundant and stable cash flow, and is expected to continue to maintain a high cash dividend ratio.

Investment advice

We expect coal prices to remain high for the next 2-3 years. As the largest coal producer in East China, there is still plenty of room for future growth in production and sales. We estimate that the company's revenue for 24-26 will be 148.563 billion yuan, 155.963 billion yuan, and 163.918 billion yuan, respectively, and net profit to mother will be 16.358 billion yuan, 19.734 billion yuan, and 21.542 billion yuan respectively; earnings per share will be 1.63, 1.97, and 2.15 yuan, respectively, corresponding to PE valuations of 8.24 times, 6.83 times, and 6.26 times. We are optimistic about the company's future development, covered for the first time, and gave it a “buy” rating.

Risk warning

The economic recession has led to a sharp drop in coal prices; downstream demand for coal falls short of expectations; risk of safety accidents in coal mines; and prices of coal chemical products fluctuate greatly