3Q24 results largely in line with expectations Pingdingshan Tianan Coal Mining announced its 3Q24 results: In 1-3Q24, revenue and net profit attributable to shareholders totaled Rmb23.3bn and Rmb2.04bn. In 3Q24, revenue was Rmb7.1bn and attributable net profit fell 27.89% YoY and stayed flat QoQ at Rmb652mn, largely in line with our and market expectations.

Easing coal costs offset falling coal prices. Output and sales volume:In 1-3Q24, raw coal output and commercial coal sales volume were 21.06mnt and 20.08mnt, down 8.7% and 13.1% YoY, mainly due to the production suspension of 12 mines and strict safety supervision measures.

In 3Q24, raw coal output was 6.85mnt (-10% QoQ), and commercial coal sales volume was 6.59mnt (+0.3% QoQ).

Prices: The long-term contract price of coking coal was lowered by about Rmb200/t in 2Q24 and by Rmb150-200/t for September. The firm's overall ASP was Rmb1,033/t in 1-3Q24 (+Rmb 78 YoY) and Rmb918/t in 3Q24 (- Rmb99 QoQ), mainly affected by the price cut in September.

Cost: Cost per tonne rose Rmb71 YoY to Rmb718 in 1-3Q24. Cost per tonne fell Rmb98 QoQ to Rmb608 in 3Q24, largely offsetting downward pressure on prices thanks to effective cost control.

Gross profit: Gross profit per tonne in 3Q24 was Rmb310, down Rmb1 QoQ. In 3Q24, GM recovered despite headwinds and rose 3.7ppt QoQ to 30%.

Expenses rose slightly QoQ: According to the firm's guidance, 12 mines resumed normal production in June, which impacted G&A expenses in 1H24, decreasing by Rmb98mn QoQ to Rmb252mn in 3Q24. R&D expenses rose by Rmb118mn QoQ to Rmb333mn, and the overall expense ratio increased by 2ppt QoQ to 13%.

Solid cash flow. In 1-3Q24, the firm's net operating cash flow was Rmb6.00bn and its capex was Rmb3.53bn. Its gearing ratio was 59%. The firm previously announced a minimum dividend payout ratio of 60% for 2023-2525, implying a dividend yield of 6.8% for 2024 based on current prices.

Trends to watch The firm plans to establish a joint venture to participate in the bidding for mining exploration rights in the Xinjiang UygurAutonomous Region. On September 30, the firm announced its intention to create a new company with China Power Investment Xinjiang Energy and Chemical Group Hefeng to develop and construct coal projects, promoting resource development in Xinjiang. The firm will contribute Rmb25.5mn and hold a 51% stake, while Xinjiang Energy and Chemical Group Hefeng will contribute Rmb24.5mn and hold a 49% stake. On October 26, the company announced plans to increase its capital by Rmb150mn to the new joint venture in the same proportion, along with Xinjiang Energy and Chemical Group Hefeng, to pay the bidding deposit for the exploration rights of the Tiechanggou No. 1 Coal Mine (64.89sq km) in the Baiyanghe Mining Area, Tacheng, Tuoli County, Xinjiang. In the medium to long term, we believe that coal development in Xinjiang is becoming increasingly strategically important amid the accelerating capacity exit in major coal-producing areas in central and eastern China. If the auction is successful, we expect the firm’s coal reserves to increase further, enhancing the firm's profitability.

Financials and valuation

Considering coal prices may remain under pressure in 4Q24, we cut our 2024 and 2025 net profit forecasts 11% to Rmb2.86bn and Rmb3.26bn.

The stock is trading at 9x 2024e and 8x 2025e P/E. Given valuation rotation, we maintain an OUTPERFORM rating and TP of Rmb13, implying 11x 2024e and 10x 2025e P/E, and offering 28% upside.

Risks

Weaker-than-expected demand; higher-than-expected supply of imported Mongolian coal; possible risks in resource auctions.