Preannounced 2023 earnings down 39.59% YoY

Shaanxi Coal Industry preannounced its 2023 results, estimating that its net profit attributable to shareholders fell 39.59% YoY (down Rmb13.93bn) to Rmb21.26bn, and recurring attributable net profit dropped 16.33% YoY (Rmb4.84bn) to Rmb24.80bn in 2023. The firm preannounced that its earnings fell YoY, but the decline in recurring earnings was milder than we expected.

We think the firm's earnings declined, as: 1) Coal prices fell YoY; and 2) changes in LONGi Green Energy’s accounting method and investment income from the disposal of part of LONGi Green Energy's shares in 2022 contributed significantly to the firm's earnings.

Trends to watch

Output and sales volume of self-produced coal increased in 2023 and slightly declined in 2M24. After consolidating Shaanxi Binchang Dafosi Mining, the firm's coal production capacity exceeded 160mnt. According to corporate filings, its coal output rose 4.1% YoY to 164mnt in 2023, and its sales volume increased 12.6% YoY to 253mnt. The firm also announced that its sales volume of self-produced coal rose 4.2% YoY to 162mnt in 2023. In 2M24, the firm's coal output fell 2.68% YoY to 26.20mnt, and sales volume of self-produced coal fell 3.53% YoY to 25.80mnt.

Coal prices are likely to remain at a historical high; firm's coal prices resilient. Data from sxcoal.com shows that the ASP of Yulin 6,000kcal thermal coal fell 20% YoY to about Rmb1,001/t in 2023. Given that the firm sells some of its coal at relatively stable prices under long-term contracts, we expect the decline in the firm's coal prices to be relatively mild in 2023.

As of March 8, 2024, the ASP of Yulin 6,000kcal thermal coal was Rmb820/t, down 8% from the median in 2023. In the near term, we expect coal prices to remain weak due to weak demand. However, we expect domestic coal supply and demand to remain balanced in 2024, and the decline in ASP to be limited. We think coal prices may stay at a record high.

We believe that controlling shareholders may increase their shareholding if the firm's share price falls, which should support the share price. The firm announced on October 27, 2023 that its controlling shareholders plan to increase their stake in the firm by no less than　　Rmb200mn and no more than Rmb300mn with their own funds in the next 12 months, at a price of no more than Rmb25/sh. We believe this demonstrates controlling shareholders’ optimism about the firm’s operations and future development.

On December 25, 2023, the controlling shareholders increased their shareholding for the first time by 2mn shares, implying an amount of Rmb41.23mn. As of March 13, the firm's share price closed at Rmb25.24, higher than the upper limit of the purchase price. However, we believe the controlling shareholders may continue to increase their stake in the firm if the share price falls. We think this should support the firm’s share price.

Financials and valuation

We lower our 2023 earnings forecast 3% to Rmb21.3bn, due to adjustments in assumptions for coal prices and impairments. We raise our 2024 earnings forecast 6% to Rmb23.6bn, and introduce our 2025 earnings forecast of Rmb22.8bn. The stock is trading at 10.4x 2024e and 10.7x 2025e P/E. We believe the firm's share price may fall due to weak coal demand in the near term.

We maintain an OUTPERFORM rating and raise our target price 30% to Rmb26 (10.7x 2024e and 11.1x 2025e P/E with 3% upside), given relatively healthy industry fundamentals, the firm’s attractive dividend yields, as well as improving market sentiment towards sectors with solid earnings and high dividends.

Risks

Disappointing coal demand; sharper-than-expected increase in supply.