3Q24results in line with our expectations

Shaanxi Coal Industry announced its 3Q24 results. In 1–3Q24, revenue fell 1.6% YoY to Rmb125.4bn , gross profit fell 8.2% YoY to Rmb43.6bn, attributable net profit fell 1.5% YoY to Rmb15.9bn (implying an EPS of Rmb1.64), and recurring net profit fell 13.9% YoY to Rmb16.3bn.

In 3Q24, revenue rose 10.7% YoY and fell 8.1% QoQ to Rmb40.7bn, gross profit dropped 1.5% YoY and 12.2% QoQ to Rmb13.7bn, attributable net profit rose 17.1% YoY and fell 8.8% QoQ to Rmb5.39bn, recurring net profit fell 3.7% YoY and 11.4% QoQ to Rmb5.17bn. The firm's core earnings remained solid, in line with our expectations.

Comments: 1) Coal output continued to increase YoY but fell QoQ in 3Q24. In 1–3Q24, the firm's commercial coal output rose 2.8% YoY to 127.77mnt. Sales volume of self-produced and purchased coal rose 2.4% and 10.4% YoY to 125.98mnt and 69.97mnt. In 3Q24, output of commercial coal and sales volume of self-produced coal rose 2.9% (-8.0% QoQ) and 5.8% YoY (+0.3% QoQ) to 41.37mn and 42.60mnt.

2) Revenue per tonne of coal declined. Based on coal sales revenue and sales volume, we estimate that the firm's sales income per tonne of coal fell 6.2% YoY to Rmb618 in 1–3Q24.The ASP of 6,000kcal thermal block coal at Kengkou in Yulin, Shaanxi fell 9.7% YoY in the same period.

3) Cost of sales per tonne improved. Based on sales costs and sales volume, we estimate that the firm's cost of sales per tonne was Rmb404 in 1–3Q24, down 2.5% or Rmb10 YoY.

4) In 1–3Q24, the firm's gross profit from coal sales fell 8.1% YoY to Rmb42.1bn and gross profit per tonne of coal fell 12.5% YoY to Rmb215.

5) In 1–3Q24, the firm's losses from fair value changes were Rmb453mn, mainly due to losses from trust products. However, the losses had narrowed in 1–3Q24 compared with the level of -Rmb3,732mn in 1–3Q23, reflecting that changes in fair value decreased after the firm reduced its exposure on investment in the secondary market and made accounting for some of its long-term investment under the equity method. In 3Q24, the firm reported profit of Rmb188mn from fair value changes, down Rmb87.83mn QoQ.

Trends to watch

Abundant resources; strong production continuity. Coal companies' cost of acquiring resources has increased markedly amid rising bidding prices for coal resources. However, Shaanxi Coal has abundant resources and ranks among the top listed companies in terms of reserves and reserve-to-output ratio; therefore, there is no need to worry about production continuity in the short to medium term. Against this backdrop, we believe the firm can grow steadily, assess access to external resources more prudently, and reasonably utilize reserve funds to achieve growth.

Earnings stability to improve further. With the expansion of the coal- fired power business, we believe the firm will transform itself from a pure resource mining company into a comprehensive enterprise. We are upbeat on the stability of the company's earnings as the integrated coal and electricity business develops, and expect cyclical fluctuations in earnings to be further mitigated.

Financials and valuation

We maintain our 2024 and 2025 earnings forecasts. The stock is trading at 11.3x and 10.7x 2024e and 2025e P/E. We maintain an OUTPERFORM rating and our TP of Rmb27.00, implying 12.2x and 11.6x 2024e and 2025e P/E, offering 8% upside.

Risks

Disappointing demand recovery and/or project progress; higher-than- expected prices for acquired assets.