Investment positives

We initiate coverage on Jinneng Holding Shanxi Coal Industry Co., Ltd (JHSCI) with an OUTPERFORM rating and a target price of Rmb14, implying 13.7x 2025e and 13x 2026e P/E, with 8% upside.

Why an OUTPERFORM rating?

Thermal coal: Demand improves for the peak season in summer; coal price is rising. As of July 18, the 5,500kcal/kg thermal coal price at Qinhuangdao Port was Rmb639/t. This represents a rebound of Rmb24/t from the low of Rmb615/t in mid-to-late June.

The industry is currently in its peak season during the summer months. As of July 18, daily coal consumption at power plants across 25 Chinese provinces totaled 6.33mnt, a significant YoY increase. We attribute this rise primarily to two factors. First, high temperatures nationwide have pushed the country's electrical load to a new historical peak [link in Chinese]. Second, hydropower output has dropped significantly compared to the same period last year. These factors are driving a gradual recovery in thermal power plants' daily coal consumption.

We expect coal prices to trend upward by mid-August. JHSCI is a low-cost producer with a flexible sales structure. We expect the company to achieve excess returns in the recovery of coal prices.

JHSCI is a benchmark operator of large-scale mines with low costs and superior resources. Potential exists for resource injections from its parent company. As of 2024, JHSCI held total resources of 4.03bnt and recoverable reserves of 1.93bnt. Its approved production capacity is 33mnt, supporting 58 years of mining life.

The firm's core Tashan mine is a benchmark large mine with a production capacity of 25mnt and an average cost per tonne of coal of Rmb276 in 2021-2023. At the bottom of the last coal cycle in 2015, this mine's profit remained positive at Rmb33/t (price per tonne - full cost per tonne).

Jinneng Holding Group, JHSCI’s parent company, is the second- largest coal group in China. Its listed production capacity was only　7.45% in 2024, the lowest among large coal groups. The firm announced in early 2025 that it would incorporate Panjiayao mine into JHSCI, which may bring 44%, 49%, and 29% incremental resources, recoverable reserves, and approved production capacity.

Solid financials and ample cash flow. As of 2024, the firm had Rmb14.2bn of net cash on hand (65% of its market cap on July 21), a debt-to-asset ratio of 29%, and an average ROE of 24% over 2020- 2024, implying a healthy financial position. In the past three years, the firm's operating cash flow was in a range of Rmb3.0-6.2bn (fluctuating with coal cycles), depreciation and amortization stabilized at Rmb1.2-1.4bn, and capex remained low, below Rmb1bn.

However, we expect its capex to rise in the coming years, given the construction of the Panjiayao mine and potential for further asset injection.

How do we differ from the market? As daily coal consumption recovers, we expect coal prices to stabilize and rebound slightly. As a thermal coal producer with a flexible sales structure and a focus on the coal business, JHSCI should benefit first from an industrywide earnings recovery, in our view.

Potential catalysts: Thermal coal price rebounds; asset injection proceeds faster than expected.

Financials and valuation

We expect the firm's EPS to be Rmb1.02 in 2025 and Rmb1.07 in 2026, implying a CAGR of -20% over 2024-2026. The stock is trading at 12.8x 2025e and 12.1x 2026e P/E. We initiate coverage with an OUTPERFORM rating and a target price of Rmb14, implying 13.7x 2025e and 13.0x 2026e P/E, and offering 8% upside.

Risks

Disappointing demand; higher-than-expected coal imports and domestic supply; higher-than-expected capex; coal mine accidents.