SHAANXI COAL INDUSTRY(601225)：PREANNOUNCED EARNINGS FALL DRAGGED BY FAIR VALUE FLUCTUATIONS AND FALLING COAL PRICES

　　1H23 earnings preannounced to fall 53-56% YoY
　　Shaanxi Coal Industry preannounced its 1H23 results: Estimated attributable net profit fell 53-56% YoY to Rmb11.2-11.8bn; recurring attributable net profit dropped 7-11% YoY to Rmb13.3-13.9bn. In 2Q23, attributable net profit was about Rmb4.3-4.9bn （with a median of Rmb4.6bn）， down 27% YoY or 34% QoQ; recurring attributable net profit was Rmb6-6.6bn （with a median of Rmb6.3bn）， down 14% YoY or 13% QoQ.
　　The firm's core earnings are largely in line with our expectations, and we attribute the preannounced earnings declines to three factors. First, investment income rose Rmb2.92bn YoY in 1H22 as the firm reduced its holding in Longi Green Energy. Second, changes in the accounting methodology for the investment in Longi Green Energy led to a Rmb9.74bn YoY rise in gains and losses from fair value changes in 1H22, while gains and losses from fair value changes declined YoY in 1H23. Third, due to lower coal prices, the firm's coal selling prices fell in 1H23.
　　Trends to watch
　　Self-produced coal output and sales volume increased YoY. According to the firm's operating data, its cumulative coal output rose 10.37% YoY to 84.06mnt in 1H23, and sales volume of self-produced coal increased 11.13% YoY to 83.36mnt. As the firm's coal output in 1H23 has reached about 52% of the demonstrated capacity of 162mnt disclosed in its 2022 annual report, we think its coal business could reach full capacity in 2023 and its full-year output may increase YoY.
　　Coal prices fell due to weak demand. According to coalresources.com, the average pithead price of 6,000kcal lump thermal coal in Yulin, Shaanxi was about Rmb910/t in 2Q23, down 21% YoY or 24% QoQ. The average pithead price of Huangling 5,000kcal thermal coal was about Rmb806/t, down 4.9% YoY or 18% QoQ. In the near term, we think stronger seasonal power demand and insufficient hydropower output may boost coal demand and support coal prices as the summer peak season approaches.
　　However, as the growth momentum of non-power coal demand remains weak, the upside in coal prices may be relatively limited in the near term.
　　Fair value changes affect the firm's earnings. According to Longi Green Energy and Qinghai Salt Lake's 1Q23 reports, the firm held about　71.896mn shares （0.95% stake） of Longi Green Energy and 266mn shares （4.90% stake） of Qinghai Salt Lake as of 1Q23. Longi Green Energy and Qinghai Salt Lake closed at Rmb28.67 and Rmb19.17 on June 30, down 29.1% and 14.3% from the last prices on March 31. Due to volatility in share prices, fluctuations in the firm's gains and losses from fair value changes weighed on its earnings.
　　Financials and valuation
　　We cut our 2023 and 2024 EPS forecasts 21% to Rmb2.28 and Rmb2.34 due to declines in coal prices. The stock is trading at 7.4x 2023e and 7.2x 2024e P/E. We maintain an OUTPERFORM rating, but we cut our TP （based on the ex-rights share price on July 12） 16% to Rmb20 （implying 8.8x 2023e and 8.5x 2024e P/E）， with 19% upside.
　　Risks
　　Demand recovery disappoints.
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   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。