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Guanghui Energy: Rising volume and prices drive record-high performance; advantages of coal from Xinjiang fuel strong growth. Author/Source: Guanghui Energy Date: 2023-04-20 Clicks: 47 On April 13, the company released its annual report for 2022; in that year it achieved revenue of 59.409 billion yuan, a 138.93% increase compared to the previous year； The net profit attributable to the parent company amounted to 11.338 billion yuan, representing a year-on-year increase of 126.61% ； After deducting non-recurring items, the net profit attributable to the parent company was 11.073 billion yuan, representing a year-on-year increase of 117.53% ； Cash flows from operating activities amounted to 10.146 billion yuan, a year-on-year increase of 67.74%, with basic earnings per share at 1.73 yuan. It is proposed to distribute a cash dividend of 0.8 yuan per share (including taxes) to all shareholders. In Q4 2022, the company achieved operating revenue of 22.13 billion yuan, a year-on-year increase of 163.58% and a quarter-on-quarter increase of 38.68% ； The net profit attributable to the parent company amounted to 2.936 billion yuan, representing a year-on-year increase of 30.95% but a month-on-month decrease of 10.24%. On the same day, the company released its first-quarter report for 2023. In Q1 2023, the company achieved revenue of 19.862 billion yuan, a year-on-year increase of 111.35%, but a quarter-on-quarter decrease of 10.25% ； The net profit attributable to the parent company amounted to 3.007 billion yuan, representing a year-on-year increase of 35.86% and a month-on-month increase of 2.42%. Comment: In 2022 and Q1 2023, both the volume and prices of coal and natural gas operations increased, driving rapid growth in performance. Coal: In 2022, the company’s raw coal production was 20.446 million tons (a year-on-year increase of 98.7%), while coal sales amounted to 26.703 million tons (a year-on-year increase of 33.86%). The average selling price of coal was 569.9 yuan per ton (a year-on-year increase of 31.6%) ； The simultaneous increase in volume and prices in the coal business contributed to the sector achieving revenue of 15.22 billion yuan for the whole year (a year-on-year increase of 76.2%), with a gross profit of 6.73 billion yuan (a year-on-year increase of 84.4%). In Q1 2023, the company’s raw coal production was 6.769 million tons (a year-on-year increase of 76.7%, and a quarter-on-quarter increase of 12.7%), while coal sales amounted to 8.844 million tons (a year-on-year increase of 50.6%, and a quarter-on-quarter increase of 17.7%). Natural gas: In 2022, the company sold 4.598 million tons of LNG (a year-on-year increase of 45.2%), with an average selling price of 7,494.6 yuan per ton (a year-on-year increase of 100.2%). Of this amount, 4.081 million tons were purchased from external sources in Qidong (a year-on-year increase of 59.8%) ； Benefiting from the \"European premium\" and low-cost long-term gas contracts, the natural gas segment achieved revenue of 34.46 billion yuan during the year (a year-on-year increase of 190.6%), with a gross profit of 7.19 billion yuan (a year-on-year increase of 92.7%). In Q1 2023, the company sold 1.51 million tons of LNG (a year-on-year increase of 82.7% and a month-on-month decrease of 14.3%), of which 1.369 million tons was purchased from Qidong (a year-on-year increase of 98.8% and a month-on-month decrease of 14.5%). Coal chemical industry: In 2022, the coal chemical sector achieved operating revenue of 8.77 billion yuan (a year-on-year increase of 113.6%), with gross profit of 3.05 billion yuan (a year-on-year increase of 45.8%). In 2022, the company’s methanol sales volume was 1.385 million tons (a year-on-year increase of 21%), while coal-based oil product sales amounted to 665,000 tons (a year-on-year increase of 8.9%). Ethylene glycol sales totaled 101,000 tons; production of this product started in June 2022 ； In Q1 2023, the company’s methanol sales volume was 522,000 tons (a year-on-year increase of 79.6%, but a month-on-month decrease of 9%), while its coal-based oil product sales volume was 178,000 tons (a year-on-year decrease of 2.9%, and a month-on-month decrease of 9.6%). Benefiting from the accelerated development of coal mining in Xinjiang during the 14th Five-Year Plan period and the efforts to ensure a stable supply of coal, the company’s main coal mines are expected to see an increase in production, while the rise in the volume of coal exported from Xinjiang will expand its profit margins. Production: The Baishi Lake Coal Mine has been designated as a coal mine for ensuring supply; its approved production capacity was increased from 13 million tons per year in 2022 to 18 million tons per year, with actual annual production reaching over 35 million tons ； The procedures for the Malang coal mine are progressing smoothly. In December 2022, the company announced that the Department of Natural Resources of Xinjiang Autonomous Region had accepted the application for granting new mining rights. Once the certification process is completed in the near future, production is expected to increase rapidly. Moreover, the quality of the coal from Malang is good, with a calorific value of 5,800–6,000 kilocalories per unit ； The Eastern Coal Mine is expected to start contributing to production by the end of 2024 or in 2025. As the production from Malang and the eastern coal mines gradually increases, the company’s coal output is expected to grow rapidly. We anticipate that the company’s coal production will reach over 55 million tons in 2023, 65 million tons in 2024, and 75 million tons in 2025 (including the amount used for internal needs). Export of coal from Xinjiang: The company has a significant geographical advantage when it comes to selling coal outside Xinjiang. With the expansion of transportation capacity on the Hongnao Railway and Lanzhou-Xinjiang Railway, as well as the completion of the Linhai-Harbin connection line, the volume of coal exported from Xinjiang by this company is likely to increase, and its sales radius is set to keep expanding ； The company is continuing to work on the Sichuan Guangyuan Comprehensive Logistics Base (with phase 1 scheduled to become operational by the end of 2024) as well as the Ningdong Energy and Chemical Industry Base project (with phase 1 set to start construction in early 2023). The coal prices in regions such as Ningxia, Sichuan, and Chongqing are significantly higher than those in Xinjiang (taking railway transportation costs into account). Once these projects are operational, the company will be able to secure railway transport capacity on a ‘point-to-point’ basis, thereby accessing markets in those areas and increasing its coal sales volume and profit per ton. The cost advantages of long-term gas supply contracts become evident, while the expansion of the Qidong receiving station helps boost gas sales volumes. Gas source: The company purchases trade gas using a \"long-term contract + spot market\" approach, and has signed LNG import contracts with multiple energy suppliers; among these, the 10-year contract with Total offers stability and significant cost advantages. Receiving station: By 2022, the processing capacity of the Qidong LNG receiving station had reached 5 million tons per year. The construction of Project 6, which involves a 200,000-cubic-meter storage tank, as well as Project 2, is underway, and it is expected that the processing capacity of this receiving station will exceed 10 million tons per year by 2025. Demand: Given the mismatch between global gas supply and demand, price differences between different regions are likely to persist. The company can flexibly choose between high-profit international resale operations or domestic sales of imported gas, depending on market conditions. Profits from the gas business are expected to remain at a good level in 2023, and in the long term, these profits are likely to increase further driven by an increase in gas sales volumes. The green transition is advancing steadily, with the first 100,000 tons per year CCUS demonstration project set to go into operation soon. According to a announcement released by the company on March 27, 2023, the first phase of the \"3 million tons per year integrated project for carbon dioxide capture, transportation, and oil enhancement\" that was planned and constructed by the company in 2021, namely the \"100,000 tons per year CCUS pilot project\", has entered the trial operation stage. This indicates that the company is making positive progress in its green transformation, while the second phase of the project with a capacity of 3 million tons per year is currently in the process of completing the necessary preliminary procedures. In the field of hydrogen energy, at the beginning of 2022 the company released the \"Development Strategy Plan for the Hydrogen Energy Industry Chain (2022–2030)\". Based on this plan, the first phase of the \"Green Electricity-based Hydrogen Production and Integrated Hydrogen Energy Demonstration Project\" is expected to be completed by mid-2023, marking a significant step forward in accelerating the development of the company’s hydrogen energy industry. Profit forecasts and rating: Guanghui Energy possesses abundant coal resources in Xinjiang, along with railway infrastructure for transporting coal out of the region; it will thus benefit greatly from the accelerated development of coal mining in Xinjiang and its transportation to other areas. Its Malang Coal Mine and Eastern Coal Mine are expected to begin operations gradually during the 14th Five-Year Plan period, allowing the company’s coal production to keep increasing. Benefiting from improved conditions for transporting coal, its sales reach outside Xinjiang is also set to expand over time. In terms of natural gas, the handling capacity of the Qidong LNG receiving station reached 5 million tons per year in 2022, and it is expected to increase further to 10 million tons per year by 2025. We have adjusted the company’s forecasts for net profit attributable to shareholders for the periods 2023–2025 to 15.82 billion, 20.07 billion, and 23.72 billion respectively; the EPS figures are 2.41 yuan, 3.06 yuan, and 3.61 yuan respectively. Based on the closing price on April 13th, the P/E ratios are 3.83X, 3.02X, and 2.56X respectively. We maintain a “Buy” rating for the stock.