3Q24 results slightly miss market expectations

Huaibei Mining Holdings announced its 1-3Q24 results: Revenue rose 2.04% YoY to Rmb56.7bn and net profit attributable to shareholders fell 18% YoY to Rmb4.14bn. In 3Q24, revenue totaled Rmb19.5bn, and attributable net profit fell 18.12% YoY to about Rmb1.2bn. The 3Q24 results slightly missed market expectations due to a cut in long-term contract prices in September and weak coke business earnings.

Coal business: Output and sales volume: In 1-3Q24, output and sales volume of commercial coal (excluding domestic sales, the same below) fell 6% and 14% YoY to 15.67mnt and 11.88mnt, mainly due to the suspension of Xinhu Coal Mine. In 3Q, commercial coal output fell 1% YoY, but rose 5% QoQ to 5.35mnt, and sales volume fell 3% YoY and 4% QoQ to 3.85mnt, slightly missing expectations due to higher domestic sales volume.

Prices: In September, the long-term contract price of coking coal triggered a circuit breaker mechanism. In September, prices were cut by around Rmb200/t for main coking coal, Rmb150/t for 1/3 coking coal, and dozens of renminbi for blended coal. In 3Q24, the overall ASP was Rmb1,053/t, up Rmb27 YoY and down Rmb59 QoQ.

Costs: In 3Q24, cost per tonne rose by Rmb29 YoY and Rmb4 QoQ to Rmb541, implying largely stable. The firm made a large amount of provisioning for maintenance fees.

Gross profit per tonne was Rmb512 in 3Q24, down Rmb2 YoY and Rmb63 QoQ .In addition, the firm shifted from thermal coal to 1/3 coking coal at Zouzhuang Mine in 1H24, bringing considerable additional profit.

Coal chemical business: Coke: In 3Q24, output and sales volume were 0.95mnt and 0.89mnt, with ASP falling 8% YoY and 5% QoQ to Rmb1,843/t, with prices continuing to fall and coke losses widening QoQ. We believe this is an important reason behind the disappointing earnings. Looking ahead, we expect coke business losses to gradually narrow in 4Q24 and 2025, as prices recover slightly and the firm controls the pace of overhauls.

Methanol: Output and sales volume totaled 0.13mnt and 0.04mnt in 3Q24, with ASP +6% YoY and -3% QoQ to Rmb2,152/t.

Ethanol: Output and sales volume reached 0.15mnt and 0.15mnt in 3Q24, with ASP at Rmb5,147/t and we estimate net profit per tonne at more than Rmb300.

Financials: In 1-3Q24, operating cash flow was Rmb7.8bn and capex was Rmb5.5bn; gearing ratio was around 48%.

Trends to watch

Rising coal output and loss reduction in coal chemicals business lay foundation for earnings in the next two years. The firm is implementing September long-term contract price (main coking coal at Rmb1,890/t) for 4Q24, which came under pressure YoY and QoQ. However, the spot price has been rising since September, which we think may trigger the mechanism of adjusting long-term prices again. In addition, we expect the firm's coal chemical losses to narrow QoQ amid price recovery, offsetting some downward pressure on coal prices.

Looking ahead, we believe the firm’s coal output has upside (Xinhu mine to resume production in 2025 and Taohutu project to be put into operation by end-2025). This, coupled with effective cost control and gradual decline in coal chemical business losses, means that its earnings are likely to recover. Hence, we are still upbeat on the medium-to-long-term investment value of Huaibei Mining.

We note that the firm's capex may decline after the launch of Taohutu at end-2025, enabling it to further increase its dividends. Based on a dividend payout ratio of 42% in 2023, the firm’s current share price implies a dividend yield of 5.9% in 2024.

Financials and valuation

We keep our 2024 and 2025 earnings forecast unchanged. The stock is trading at 8.1x and 7.4x 2024e and 2025e P/E. We maintain an OUTPERFORM rating and our target price of Rmb19, implying 9.8x and 9.0x 2024e and 2025e P/B, offering 22% upside.

Risks

Weaker-than-expected demand; disappointing production resumption at Xinhu and/or earnings recovery in coal chemicals business.