Investment Rating - The report assigns a "Buy" rating to the company with a target price of HKD 3.52, indicating a potential upside of 22% from the current price of HKD 2.89 [6][81]. Core Insights - The company possesses unique coking coal resources with superior quality, being located in a major reserve area in Shanxi Province, China. The coking coal produced is highly valued and referred to as "Panda Coal" due to its scarcity and economic value [3][56]. - The financial health of the company is robust, with no interest-bearing debt and a significant cash flow, allowing for high dividend payouts. The company has a commitment to a minimum dividend payout ratio of 40%, with actual rates averaging around 80% in recent years [5][66][71]. - The company is expected to see a recovery in profitability in 2026 as coking coal prices stabilize and the approval for the Guojiaogou coal mine project is anticipated to provide additional growth opportunities [4][6][76]. Summary by Sections Company Overview - The company, established in 1985, is primarily engaged in the mining and production of coking coal in Shanxi Province, a key area for high-quality coking coal in China [12][13]. Coking Coal Market Dynamics - The coking coal market is experiencing limited new capacity due to strict safety regulations and a decrease in overseas imports. Domestic production is expected to stabilize, leading to a potential tightening of supply and upward price elasticity [32][41][52]. Company Highlights - The company has three operational coking coal mines with a total production capacity of 5.25 million tons per year, and it is actively pursuing the approval for the Guojiaogou coal mine, which could add significant capacity [3][16][76]. - The average selling price of coking coal has seen fluctuations, with a significant drop in 2025, but a recovery is expected in 2026 as market conditions improve [4][51][81]. Financial Performance and Forecast - The company reported a decline in revenue and profit in 2023 and 2024 due to lower coking coal prices and production disruptions. However, projections for 2026 indicate a recovery in both revenue and net profit, driven by improved market conditions and operational efficiencies [7][81].

Core Viewpoint - CICC has lowered coal price and cost assumptions, resulting in a 4% reduction in Shougang Resources' (00639) 2025/26E profit to HKD 8.92 billion and HKD 9.78 billion respectively [1] Group 1: Financial Performance - The company's 1H25 net profit attributable to shareholders decreased by 38% year-on-year to HKD 4.04 billion, which was better than CICC's expectations due to a smaller decline in profit driven by coal prices, as the cost reduction exceeded expectations [2] - 1H25 production of raw coking coal and premium coking coal increased by 17% and 19% year-on-year to 2.64 million tons and 1.54 million tons respectively, with 100% of raw coal being washed [2] - The average selling price of premium coking coal in 1H25 fell by 45% year-on-year to HKD 1,067 per ton, while the price of Shanxi main coking coal decreased by 36% to HKD 1,401 per ton [2] Group 2: Cost and Cash Flow - The unit production cost of raw coking coal improved significantly in 1H25, decreasing by 28% year-on-year to HKD 328 per ton, with cash costs down by 32% to HKD 241 per ton [3] - The net operating cash inflow in 1H25 was HKD 4.53 billion, a decrease of HKD 7.27 billion year-on-year, with available free funds amounting to HKD 94.75 billion as of the end of June [3] - The company plans to distribute an interim dividend of HKD 0.06, corresponding to a payout ratio of 76%, resulting in an interim dividend yield of approximately 2.2% based on the current share price [3] Group 3: Market Outlook - CICC maintains a cautiously optimistic view on the coking coal market for 2H25, noting a rebound in coking coal prices since July due to supply contraction in some regions, with prices rising from HKD 968 per ton in June to HKD 1,278 per ton by August 28 [4] - The average price of coking coal in 3Q25 was HKD 1,209 per ton, reflecting a 10% increase compared to 2Q25 [4] - Future price increases may depend on further supply reductions, as demand for coking coal is expected to contract due to weak steel demand and declining profits [4]