In a positive profit alert released last night, Risun(the "Company") announced that it expects 1-4M21 net profit to increase by over 250% compared with that in 1H20. This implies net profit of over RMB1,228 mn for the first 4 months in 2021, accounting for more than 36.1% of our full-year earnings estimate. Per Risun's announcement, the profit surge during the period was primarily due to 1) widened coke-coal price spreads,2) the consolidation of the 6 acquired coking firms in Shandong since Jan.2021, and 3) increased profit from caprolactam and styrene(Risun's 300,000 tons/year styrene project came on stream in Dec.2020). Our key takeaways from Risun's announcement are as follows:
During 1-4M21, the average selling price (ASP) of Risun's coke products was RMB2,330/ton vs. RMB1,590/ton in 1H20, while the cost of coal remained stable at approximately RMB1,000/ton. This implies per ton profitability (coke products) of over RMB1,000, which may not be sustainable, especiallyconsidering the upcoming capacity additions in the industry and the recent signal released by China's State Council on curbing surging commodity prices. For Risun's coke products, we currently assume an ASP of RMB2,050/ton with a per ton profitability of around RMB500 for the whole year in 2021.
Risun quickly turned around the businesses of the 6 acquired coking firms (the Xinda project), which recorded a combined loss of RMB131 mn in 1H20. Per Risun's announcement, during 1-4M21, the 6 acquirees recorded earnings of around RMB260 mn, accounting for 57.7% of our full-year estimate or 52.0% of Risun's full-year guidance(mid-point). This, in our view, significantly reduces the uncertainty to Risun's financial result this year.
Overall, Risun's profit surge during 1-4M21 is in line with our expectation, while the quick turnaround of the businesses of the 6 acquired coking firms significantly reduces the downside risk to our 2021 earnings forecast of RMB3,400 mn.
Our investment rating is"Buy"with a TP of HK$6.00. Since 4Q20, Risun has seen improved market conditions driven by China's cyclical recovery and more stringent supply-side control under the country's new climate pledge. We now see Risun as a high growth company with steady capacity expansion and improved profitability over the next few years. Despite a recent stock price rally, Risun's valuation remains relatively low compared with its peers. Our TP of HK$6.00 is based on a 2021 PE of 6.0x, which falls in the lower end of the 5.0×-8.0× 2021 PE range among vertically integrated coal companies listed in Hong Kong.