The net profit of Shougang Resources fell 30% YoY to HK$1,889m in 2023, 13% below our forecast. The discrepancy mainly came from the additional amortisation and lower-than-expected sales volume. For 2024, we expect its earnings to drop 7% YoY after raising our forecast by 10% mainly to factor in the deferred sales of 0.15m tonnes of clean coal. After the recent drop in share price, the company’s shares offer attractive dividend yield of 7.9-9.7% for the coming three years assuming payout ratio stayed at 74%. Hence, we upgrade our call from HOLD to BUY with target price remained at HK$3.16.
　　Key Factors for Rating
　　The sharp fall in earnings in 2023 was mainly due to the 20% YoY fall in realised coal price. While clean coal output edged up 1% YoY to 3.25m tonnes in 2023, its clean coal sales volume dropped 7% YoY to 3.1m tonnes as 0.15m tonnes of clean coal in transit to clients were not qualified as sales in 2023.
　　The company ceased mining at #4 coal seam at Xingwu Mine and Zhaiyadi Mine in late 2023. Hence, it wrote off relevant mining rights of HK$241m in 2023, which is an expense we did not take into account.
　　For 2024, we expect the company’s raw coal output to drop 8% YoY to 4.8m tonnes as the company will relocate the production at Xingwu Mine to a new working face at the deeper #9 coal seam. This will disrupt the production at the mine for a few months. However, we expect the coal sales volume to be flat as the booking of the sales of the above-mentioned 0.15m tonnes of clean coal will be deferred to 2024.
　　While its raw coal production cost slipped 1% YoY to RMB401/tonne in 2023, the unit cash cost actually dropped 11% YoY to RMB292/tonne as unit D&A cost was boosted by the additional amortisaton of mining rights. For 2024, the company targets to keep the controllable unit cash cost flat.
　　While the company reduces its payout from 80% in 2022 to 74% in 2023, its cash payout ratio is still the highest among the coal peers. As long as it can maintain the payout ratio, its shares offer highly attractive forward dividend yield of 10.5% based on 2023 DPS.
　　Key Risks for Rating
　　Sharp fall in coking coal prices.
　　Higher-than-expected costs.
　　Valuation
　　Despite the miss in earnings and change in forecasts, the company’s average 2023-25E ROE stays at 10.6%. Hence, we maintain our target valuation at 0.93x 2024E P/B and our target price at HK$3.16. This is equal to 9x 2024E P/E.