Sealand: KINETIC DEV (01277) is rated as "Buy" for the first time, with potential for further growth in performance.

Sealand issued a research report stating that it is expected that KINETIC DEV (01277) will have operating income of 5406.45/6118.27/6815.50 million RMB in 2025-2027, with net profit attributable to shareholders of 1288.04/1879.75/2143.48 million RMB, with year-on-year changes of -38.95%/+45.94%/+14.03%; EPS is expected to be 0.15/0.22/0.25 RMB, corresponding to a current stock price PE ratio of 7.83/5.36/4.70 times. The company's main business, Da Fan Pu Coal Mine, has strong profitability, a high dividend payout ratio in recent years, and a stable pace. High equity incentives help reduce agency costs, and with the production of Yong'an Coal Mine and Wei Yi Coal Mine and the orderly progress of the acquisition of South Africa's MC Mining, there is still room for performance growth. Additionally, the current valuation is low, and overall, the company is considered to have investment value. It is covered for the first time and rated as "Buy". Sealand's key points are as follows: KINETIC DEV is a private integrated coal production, operation, and sales enterprise, with "Four Highs" advantage of high profitability, high dividend payout, high production capacity growth, and high equity incentives: 1) High profitability: From 2018 to 2024, the company's ROE has continued to lead major thermal coal enterprises, mainly benefiting from high sales net profit margin drive (the central level from 2018 to 2024 reached 36.97%, while major thermal coal enterprises mainly fluctuate within the range of 5%-20%). The company's excellent profit on a per ton of coal basis supports its high sales net profit margin. With Da Fan Pu Coal Mine's excellent coal quality and efficient sales strategy, the company achieves a higher sales price per ton of coal compared to its peers, while the cost per ton of coal is relatively low compared to its peers. From 2021 to 2024, the gross profit per ton of coal is in the high range of 400-600 RMB/ton, which is about 80-110 RMB/ton higher than the central level of major thermal coal enterprises (considering that KINETIC DEV's sales costs may include government surcharges or resource taxes, the per ton gross profit may be underestimated). 2) High dividend payout: Benefit from the company's low leverage and strong cash conversion capabilities from revenue, the dividend payout ratio from 2022 to 2024 has gradually risen to a high level of 56.57%. As of the 2025 interim report, the company has announced a total of 657.68 million RMB in mid-term and special stock dividends to be distributed in 2025, with a dividend yield of 6.56% calculated based on the market value on December 23. The dividend payout rhythm is relatively stable, with the company implementing a "mid-term + final-term" dividend payment for eight consecutive years from 2017 to 2024, as well as distributing special stock dividends for three consecutive years starting from 2023. In addition to our analysis, the overall scale of the company's real estate acquisitions appears controllable and is gradually being digested. 3) High production capacity growth: The company currently has production capacities of 6.5 million tons of thermal coal in operation and a planned production capacity of 2.1 million tons of coking coal under construction (Yong'an and Wei Yi coal mines, expected to be in production by 2026/2027, respectively). In addition, the company has gradually acquired a 51% stake in MC Mining's project in South Africa (based on the expansion standard). The main project covers both thermal coal and coking coal, with the key project, the Makhado project, expected to start joint testing in 2026, with a target raw coal mining rate of 3.2-4 million tons per year. Both domestic and foreign additional production capacities include higher value-added coking coal, which is expected to enhance the company's coal business performance in terms of quantity and price. 4) High equity incentives: By the 2025 interim period, the company has granted 263.50 million shares of incentive shares to employees under the 2023 share reward plan (accounting for 3.13% of the issued shares on the grant date), contributing to alignment of interests between management and shareholders, thus reducing agency costs. Risk warning: 1) Risks of coal price fluctuations exceeding expectations; 2) Risks of imported coal affecting the market; 3) Risks of construction projects not meeting expected production levels; 4) Risks of sustained substitution by renewable energy sources; 5) Risks of exceeding expectations in environmental regulations; 6) Differences in valuation systems between Hong Kong and A-shares; 7) Risks of related party transactions by major shareholders.