Risun’s 2021 shareholders’ profit hit a historic high of RMB2,613 mn, up 58.1% yoy, boosted by sustainable incremental earnings from the Shunri Xinze M&A project and organic styrene capacity addition. Gross margin, however, declined 1.9 ppt yoy to 14.4% in 2021, hit by narrowed price spreads between coke and coking coal in 4Q21 amid China’s power crunch - Risun’s monthly avg. coal-coking coke price spreads dropped from RMB742/ton-RMB1,179/ton between January and October 2021 to RMB339/ton-RMB485/ton in the last two months of the year. The worst is arguably over with rounds of coke price hikes YTD driven by robust demand from both domestic and overseas steel plants, and we believe Risun’s avg. coke-coking coal price spreads went up to above RMB800/ton in March 2022.
　　Management sees further earnings growth potential, in light of 1） a robust profitability outlook for China’s coking industry amid decarbonisation and supply shocks following the Russia-Ukraine conflict, and 2） the Company’s planned capacity addition in coke and caprolactam in 2022-2023, increasing bargaining power over suppliers/ customers, growing operation management and trading businesses, and multiple cost-saving initiatives from 2022 onwards. We expect earnings to grow at a CAGR of 33.7% in 2022-2024, mainly reflecting the expected results of Risun’s planned capacity expansion while assuming the Company’s segmental gross margins to remain at 2021 levels during our forecast period.
　　Maintain "Buy" with a TP of HK$6.00. Our TP is based on 6.0x 2022 PER, while HK-listed integrated coal companies currently trade at 4.1x-7.6x 2022 PER.