South Gobi (01878), where the stock price often rides the “roller coaster,” and once again, it is on the stock price roller coaster.

In early trading on May 16, South Gobi's stock price fell rapidly. At one point, it fell nearly 30%. In the end, the stock price plummeted by 28.04% to HK$4.26. The next day, its stock price broke out of yesterday's sharp decline, rising slightly by 4.23% to HK$4.44. The latest market value was HK$1,313 billion.

As a typical “small-cap stock” in the Hong Kong stock market, its stock price often shows a “steep” trend due to capital speculation, and sharp rises and falls are “commonplace.” For example, after recording an increase of nearly 15% on February 16 and 22, it fell one after another, falling more than 30% over 10 trading days from March 5 to 18.

However, this time, the sharp drop in South Gobi's stock price was clearly affected by the first quarter results. Why is this?

Net revenue and profit both increased, but business sustainability is questionable

Dismantling the latest performance in South Gobi, it is easy to see that doubts about business continuity and high pressure on cash flow are the company's current “immediate worries.”

According to reports, South Gobi is a comprehensive coal supplier with coal production, logistics, and sales capabilities. It has strategic coal resources, logistics infrastructure, and one-stop production, distribution and marketing capabilities. In terms of coal resources, South Gobi holds mining and exploration licenses for Mongolia's Obaut Tauragai coal mine and several coking coal and thermal coal deposits in Mongolia's South Gobi Province. Judging from its operating strength, South Gobi is the only investment platform with Chinese and Mongolian elements in the capital market. The largest shareholders are China Cinda Asset Management Co., Ltd. and China Investment Co., Ltd.

However, although it has high-quality coal resources, it does not mean that the fundamentals of South Gobi have no hidden worries.

In the first quarter of this year, the overall sales situation in South Gobi showed a trend of “volume increase and price reduction”, recording sales of 1.1 million tons, compared to 600,000 tons in the first quarter of 2023; during the period, the company achieved an average sales price of 79.5 US dollars per ton, down 24.6 US dollars from the same period in 2023. Among them, the average realized decrease in sales prices was mainly due to changes in the company's product portfolio and falling prices of high-quality semi-soft coking coal and processed coal.

According to reports, in the first quarter of 2024, South Gobi's product portfolio included about 34% high-quality semi-soft coking coal, 27% standard semi-soft coking coal/high-quality thermal coal, 11% standard thermal coal, and 28% processed coal, while in 2023 it was about 55% high-quality semi-soft coking coal, 2% standard semi-soft coking coal/high-quality thermal coal, and 43% processed coal.

However, the trend of “volume increase and price reduction” did not affect the company's revenue and profit performance: during the reporting period, South Gobi achieved revenue of US$82.69 million, an increase of 33% over the previous year; net profit attributable to the company's equity holders was US$12.252 million, an increase of 55.98% over the previous year.

At a glance, the double-digit increase in net profit clearly reflects the company's growth power, yet a close examination of the financial report revealed that the matter was not that simple.

In its financial report for the first quarter, South Gobi stated that the operating capital deficit reached US$240.8 million on March 31, 2024, which included a number of major liabilities, namely the payment of US$87.2 million in trade and other payables and US$83.5 million in additional taxes and tax fines. The company may fail to repay all trade and other payables due on time, and as a result, continued delays in payment of certain trade payables and other payables due to suppliers and creditors may result in potential legal action and/or bankruptcy proceedings against the company.

Comparing its balance and liability structure, it is not difficult to see its financial pressure. According to financial data, as of the first quarter of 2024, the company's total assets were 320 million yuan, total liabilities were 447 million yuan, and net assets were -127 million yuan. Furthermore, by the end of 2023, the company's cash and cash equivalents at the end of the period were only 48 million yuan, and the company's overall cash flow was scarce.

In addition, looking at the long term, the fluctuating performance does not seem to ease South Gobi's current operating concerns: from 2020 to 2023, the company's revenue growth rates were -33.74%, -49.51%, 68.40%, and 353.60%, respectively; the year-on-year growth rates of net profit to mother were -578.20%, 28.45%, -111.64%, and 102.98%, respectively. The overall operating capacity showed a fluctuating growth trend.

Based on this, it is easy to see that doubts about operating performance and fluctuations in growth capacity are the biggest “roadblocks” to attract the attention of investors in the secondary market. After all, fundamentals are the key elements for investors to measure investment value, and it is obviously difficult to arouse investors' interest if they are not hard-core enough.

The coal center is about to move up, and individual stocks with high dividends and cyclical flexibility are more popular

Although the fundamentals are unsatisfactory, the coal track in South Gobi may add a different investment value to it.

Looking at the coal market from 2023 to now, coal prices first subsided and then rose. The overall downward pullback in the coal price center has increased growth pressure on many coal companies, but high dividends and cyclical flexibility are still the main investment routes for the industry.

According to reports, the price of thermal coal & coking coal in 2023 showed a trend where the average price of Q5500 produced in Qingang thermal coal in Shanxi was 965 yuan/ton, -24% year over year. Among them, the 2023Q1 thermal coal price reached the highest level (Q1 average price 1129 yuan/ton, -21% month-on-month); in 2023, the average price of main coking coal in Jingtang Port (Shanxi) was 2,283 yuan/ton, -19.6%. Among them, the 2023Q4 main coking coal price reached a high level for the whole year (Q4 average price 2562 yuan/ton, + month-on-month ratio) 20.5%)

Affected by the downward trend in the coal price center, overall coal performance declined from the best profit level in 2022, but it is still at a historically good profit level — according to Open Source Securities statistics, in 2023, 27 listed coal companies achieved operating income of 1370.1 billion yuan, -9.9% year on year, and achieved net profit of 185.4 billion yuan, or -23.7% year on year.

Time moved to 2024 Q1, and coal prices continued to fall year on year, and the performance of listed coal companies was under short-term pressure: according to relevant research data, the average closing price of the 2024Q1 Q5500 in Qinhuangdao Port was 902 yuan/ton, -20.1% YoY, -5.8% month-on-month; the average price of main coking coal (produced in Shanxi) in 2024Q1 was 2,412 yuan/ton, -4.1% YoY and -5.9% YoY. Affected by this, the performance of 27 listed coal companies was under pressure in the short term. In Q1, they achieved total revenue of 327.2 billion yuan, -11.7% year-on-year; total net profit to mother was 42.2 billion yuan, or -33.7% year-on-year.

Judging from the above industry trends, it is clear that the overall downward trend in the coal price center has also increased the operating pressure in South Gobi to a certain extent. However, it should be noted that since April of this year, coal prices have gradually rebounded steadily. Among them, the liquidation price of 5,500Q thermal coal in Qingang began to rebound after falling to the bottom of 801 yuan/ton on April 12, 2024. This may also provide some upward opportunities for coal companies.

Among them, Minsheng Securities said that the rise in coal prices did not change until mid-July, and the increase was limited, and then the rise may accelerate. Looking ahead to the future market, considering the current peak season of incoming water, the increase in hydropower output, and the low power generation base in the same period last year, we expect the current hydropower generation growth rate to be high, partially squeezing thermal power, and the increase in coal prices will not change, but the increase may be limited; after mid-July, the hydropower base will return to normal combined with thermal power generation, and coal prices are expected to rise at an accelerated pace, and the price of thermal coal is expected to reach 1,200 yuan/ton by the end of the year.

Guotai Junan Securities also pointed out that in the first quarter of 2024, under continuous pressure tests on the demand side, coal prices experienced a double bottom. Considering the year-on-year base problem and the clear bottom of coal prices in April, it was determined that the downward pressure on Q2 performance eased markedly. At the same time, the obvious performance is that the larger the enterprise, the greater the stability of profits, which also confirms the characteristic that leading large enterprises are more popular under the dividend investment strategy.

Meanwhile, Open Source Securities also stated that the coal stock market and coal prices since November 2023 have been desensitized, and the high dividend logic is still expected to be reshaped in a weak economy and low interest rate environment; in addition, the current round of coal price correction is large, leaving more room for a rebound in coal prices. Whether it is thermal coal or coking coal, the cyclical elastic logic is expected to be evident, so it is expected to attract cyclical capital entry. However, when high dividends and cyclical elasticity are combined, coal stocks with cyclical elasticity and high dividend characteristics are expected to be favored by more capital.

In summary, with coal prices bottoming out in Q1, it is likely that coal will rebound after mid-July, and along with the upward movement of the coal center, some high-quality coal stocks with stability, high dividends, and cyclical elasticity are expected to be the first to usher in development opportunities. However, for South Gobi, the primary issue is whether it, which is currently in a state of negative assets, can resolve doubts about the sustainability of operations.