Investment positives

We initiate coverage on Pingdingshan Tianan Coal Mining (Pingdingshan Coal) with an OUTPERFORM rating and a target price of Rmb13.00, implying 10x 2024e and 8.8x 2025e P/E.

Why an OUTPERFORM rating?

Coking coal: Tight balance between supply and demand; prices of prime coking coal resilient.

1) Short-term perspective: On the demand side, coking coal consumption fell 1% YoY (or down 2.93mnt YoY) in 1H24 due to low inventory and slowing procurement at coke and steel producers amid falling steel prices and rising losses. On the supply side, domestic coking coal output dropped 8.3% YoY (or down 20.76mnt YoY) as safety supervision normalized, and imports grew 26% YoY (or up 11.77mnt YoY). We believe demand rather than supply or inventory is the key constraint for coking coal prices. We expect coking coal output to rise slightly HoH in 2H24 and imports to remain high, but full-year supply and demand are likely to remain largely balanced. We anticipate that prices of blended coal may fall in the near term, but prime coking coal prices may remain resilient.

2) Medium-to-long-term perspective: China’s existing coking coal mines might only be sufficient to supply less than 30 years of mining. Existing mines are facing challenges such as resource depletion, rising cost and difficulty in mining, and deteriorating coal quality. Supply from new mines is insufficient, and imports are unstable due to geopolitical factors. Overall, coking coal in China suffers from structural and regional shortages. Consequently, the supply of quality prime coking coal in China has further tightened and resource scarcity has presented a constraint.

Pingdingshan Coal: An undervalued leader with high-quality resource advantages. Pingdingshan Coal has coal resources with low sulfur, medium volatile matter, low alkali, and high thermal performance. As of 2023, the company has 14 coking coal mines with 1.6bnt of mineable resources and 32.03mnt of approved production capacity. Its coal mines, with theoretical service life of around 50 mining years, produced 30.94mnt of commercial coal in 2023. Specifically, coking coal output reached 12.69mnt, accounting for 41% of the firm’s commercial coal, and more than 70% of the coking coal was prime coking coal and fat coal.

Looking ahead, we see bright spots for the optimization of the firm’s coal output and product portfolio: China Pingmei Shenma Group (Shenma Group) announced that it would inject assets into the firm. Given the qualifications of mines, we believe Liangbei No.2 Coal Mine (with a capacity of 1.2mnt/yr) will likely be injected into the firm, as well as the Xiadian Coal Mine (with a capacity of 1.5mnt/yr). In addition, Pingdingshan Coal is promoting its coking coal strategy and accelerating technological upgrading of mines. The firm announced that it targets prime coking coal output of 13.05mnt (up 3% YoY) in 2024 and 15mnt (up 15% YoY) in 2025.

High dividends to enhance investment value. The firm’s net operating cash flow reached Rmb6.1bn and cash on hand was Rmb14.3bn in 2023, with a slightly high liability-to-asset ratio (63%). Its ROE averaged 15% over the past five years. The stock is now trading at 0.9x 2024e P/B. The firm previously promised a dividend payout ratio of no less than 60% in 2023-2025, and the stock is trading at 8.1x 2024e P/E, implying a dividend yield of over 7%. We believe Pingdingshan Coal is an attractive stock with inexpensive valuation.

How do we differ from the market? While the market is concerned about coal prices amid weak demand, we believe that the balance between the supply and demand of coking coal will likely remain tight. We are optimistic about the resilience of prime coking coal prices in the near term and the revaluation of high-quality coking coal in the medium and long term.

Potential catalysts: End-market demand recovers; coking coal prices stabilize.

Financials and valuation

We forecast EPS at Rmb1.29 in 2024 and Rmb1.47 in 2025. The stock is trading at 8.1x 2024e and 7.1x 2025e P/E. We initiate coverage with an OUTPERFORM rating and target price of Rmb13.00, implying 10x 2024e and 8.8x 2025e P/E, offering 23% upside.

Risks

Weaker-than-expected demand; higher-than-expected coal imports; coal mine accidents.