Henan Jinma Energy Company Limited

Henan Jinma (‘Company’) is a leading vertically-integrated manufacturer of coke and coke-related products (from coal) supplying central and western China. It is engaged in producing refined chemicals (benzene-based and coal tar-based), energy products (coal gas and LNG), trading (coke, coal, refined oil, mining equipment), and other activities (railway storage and logistics, etc.)

Its revenue share from the business segments are: Coke (53%), Refined Chemicals (15%), Trading (25%), and Energy (7%). The vast majority of profits (86%) are from the coke segment.

The coke segment is primarily dependent on the spread between coal and coke prices. This spread was fairly tight before 2017 and has widened since then. The primary demand is from the iron and steel industries.

The coal-based chemicals and energy businesses compete with petrol-based businesses, and are therefore dependent on petrol prices.

The trading business is derived from the company’s long-standing relationships with coal suppliers and customers (including those in the power industry).

The company recently invested $380m to enter the railway logistics business to strengthen downstream distribution.

It generated TTM sales of $7.7b (2019: $8.6b), ebitda of $1b (2019: $1.1b), and net profits of $538m (2019: $666m).

Revenues fell primarily due to the decline in prices of coke and petrol.

Taking recent revenues reflecting existing production capacities (set to grow with capex projects) and applying past average margins (to reflect the cyclicality of the businesses) results in normal ebitda of $980m. Deducting depreciation and taxes results in normal after-tax earning power of $550-600m. This would be slightly higher than ttm earnings but lower than 2019, which seems achievable.

The balance sheet is strong with net cash of $743m. Liquid asset ratios are healthy. The company generates excellent returns on tangible assets exceeding 20%/year reflecting its leading position in the industry.

Management’s dividend policies are reasonably shareholder-friendly – paying out $234m this year. They’ve committed to paying out a minimum of 25% of profits.

The stock sells for $1.6b ($2.97/share), which is under 3x earnings and yielding 15%.

Management announced in September that they are planning a public offering of ‘A-shares’ (listed in China) to raise capital for their expansion projects (currently $821m of capital commitments). The amount hasn’t been decided. This has the potential of severely diluting stockholders.

Based on the current facts, however, this stock appears to be selling well below the value of the company, which seems well run.