Orient Securities Company Limited released a research report stating that due to the higher volatility of coking coal prices compared to thermal coal prices, the valuation of coking coal stocks is more suitable to be viewed from an options perspective. Calculations from case studies indicate that the value of coking coal enterprises under an options perspective is significantly greater than their valuation under traditional methods. The firm recommends Huaibei Mining Co., Ltd. (600985.SH, Overweight), Pingdingshan Tianan Coal Mining Co., Ltd. (601666.SH, Overweight), Shanxi Coking Coal Energy Group Co., Ltd. (000983.SH, Overweight), and Lu'an Environmental Energy Development Co., Ltd. (601699.SH, Overweight). The main viewpoints of Orient Securities are as follows.
Traditional valuation methods for coal enterprises may have certain limitations. Traditionally, two primary methods are used to value coal companies: (1) Discounted Cash Flow (DCF) valuation for profitable companies; (2) Replacement cost valuation for unprofitable companies. In the context of "anti-involution," it is difficult for coal enterprises to experience deep losses as they did in the past. However, when coal prices are high, because expanding production requires a certain time cycle and policy control over rising coal prices is relatively difficult, the profits of coal enterprises currently exhibit a characteristic of having a "floor below and elasticity above." This characteristic is difficult to capture using the two traditional methods mentioned.
In the "anti-involution" context, coal stocks are very suitable to be viewed from an options perspective. Under the "anti-involution" backdrop, the expected annual profit per ton of coal for a coal enterprise can be viewed as an Asian call option on the coal price. Using this method for valuation can reflect the current "floor below and elasticity above" characteristic of coal enterprise profits. Furthermore, this method has stronger universality and can provide relatively reasonable valuations even for marginally profitable or loss-making enterprises. For profitable enterprises, their value is similar to an in-the-money option, while for loss-making enterprises, their value is similar to an out-of-the-money option.
Based on a typical case calculation, the value from an options perspective may be higher than the valuation from traditional methods. This analysis considers an ideal coking coal enterprise A, assuming an annual coking coal output of 10 million tons, an interest-bearing debt ratio of 0%, a current coking coal sales price of 1,000 yuan per ton, a net profit per ton of coal of 100 yuan, an annual Free Cash Flow to Equity (FCFE) of 1 billion yuan, a long-term growth rate (g) of 0%, a risk-free rate (Rf) of 2.0%, an unlevered beta coefficient of 1.0, and an average market expected return rate (Rm) of 10.0%. Under the traditional DCF discounting method, the enterprise's market value would be 10 billion yuan, corresponding to a P/E ratio of 10 times. From an options perspective, based on the volatility of coal prices this year, if the bottom-line net profit per ton is -10 yuan per ton, the value calculated from the options perspective is 14.7 billion yuan, with a P/E ratio close to 15 times.
Risk warnings include: (1) Risk of coal price fluctuations being lower than expected; (2) Risk that the intensity of "anti-involution" related policies falls short of expectations; (3) Risk that the cost control in the operation and management of coal enterprises is lower than expected; (4) Risk that changes in assumptions affect the calculation results.