Yankuang Energy (HK: 1171) shares are up 10.43% in Hong Kong this morning. This is off the back of their profits report showing a significant improvement over the last reporting period. One part of this story is simply to show us that while technology does march on there's still good money to be made in the old techs. Technological change does not, that is, sweep all before it. There are still some using AOL's dial up service and paying a monthly fee to do so. The London Hydraulic Power Company survived - actually producing power to paying customers - for half a century after the electrical revolution had made the very idea redundant. Installed bases and servicing them can continue to be a very profitable business.
So it is with the coal mining and transport business. It simply isn't true that this is all going to go away next year. Just because there are vast fleets of steel and electricity plants that still use coal. So, until those capital assets wear out - 30 to 50 year's time maybe - there will still be a market for coal. Even if that market shrinks good money can still be made out of sweating declining assets.
We can also see Yankuang's results as evidence of how the Chinese economy is booming again as it recovers from lockdown. The point here being that coal producers are commodity producers. They are price takers, it's the outside economy that determines their revenues. They can control costs, true, but not market prices. So, while production costs might not change sales prices most certainly can. Booming economies thus provide a leverage to commodity producer profits.
Yuangkuang Energy share price from Hong Kong Stock Exchange.
We can see this in the results Yangkuang has announced. Sales are up by 42%. Gross profit is up by 85%. That's the gearing, the leverage, margins rise faster than sales given - largely but not entirely - fixed production costs with rising sales prices. Note that volume of coal sold fell by 5% - gearing to market prices again. The dividend is also up nicely, RMB 30.7 per 10 shares held, plus a special dividend of RMB 12.3 per 10 shares held (the expectation is that a rising regular dividend will be the starting point for next year's dividend, while a special dividend will be a one time only event and not contributing to the expected base dividend for the next reporting period). There will also be a bonus share issue of 5 shares for every 10 held.
It's entirely true that the coal business is most unfashionable among the ESG and environmentally conscious crowd. That does change the fact that there are good profits to be made - as Yangkuang Energy is showing - by mining and transporting that most unfashionable item.