CHINA SHENHUA ENERGY(601088)：POWER BUSINESS CONTRIBUTES GROWTH AND EASES DOWNWARD PRESSURE ON EARNINGS

　　1H23 results in line with preannouncement and slightly missed our　expectations. China Shenhua Energy (Shenhua) announced its 1H23 results: Revenue rose 2.3% YoY to Rmb169.4bn, attributable net profit fell 19.2% YoY to Rmb33.28bn for A-shares, and recurring attributable net profit fell 18.6% YoY to Rmb32.97bn. Attributable net profit declined 13.3% YoY to Rmb36.86bn for H-shares. The firm’s 1H23 results were in line with its preannouncement and slightly missed our expectations. We attribute the earnings miss largely to higher coal production costs and higher average corporate income tax rate.
　　In 2Q23, revenue rose 0.9% YoY but fell 5.3% QoQ to Rmb82.4bn.
　　Attributable net profit fell 33.9% YoY and 21.2% QoQ to Rmb14.67bn for A-shares, and fell 28.6% YoY and 21.7% QoQ to Rmb16.18bn for H- shares.
　　Comments:
　　Before consolidation, gross profit of the coal and power businesses fell 13.0% but rose 40.8% YoY to Rmb43.06bn and Rmb7.42bn.
　　Coal output increased. In 1H23, the output and sales volume of commercial coal rose 2.0% and 3.7% YoY to 161mnt and 218mnt, and the sales volume of self-produced coal fell 0.4% YoY to 159mnt. In 2Q23, output and sales volume of commercial coal rose 4.9% and 5.7% YoY to 81mnt and 110mnt.
　　Coal ASP declined. In 1H23, ASP of coal fell 5.1% YoY to Rmb601/t, with that of self-produced coal down 5.2% to Rmb560/t, and that of Qinhuangdao 5,500kCal thermal coal down 13.7% YoY. In 2Q23, coal ASP was Rmb579/t (-9.0% YoY and -5.8% QoQ).
　　In 1H23, per-tonne production cost of coal for H-shares grew by Rmb9.3 YoY to Rmb167 (+5.9% YoY). Labor and other costs per tonne　rose by Rmb6.3 and Rmb1.9 to Rmb47.6 and Rmb56.9, and sales costs per tonne of self-produced coal fell 2.0% YoY to Rmb277.2. In 2Q23, per- tonne production cost of coal rose 8.5% YoY and 30.8% QoQ to Rmb188.9.
　　In 1H23, total power output dispatch rose 18.4% YoY to 94.26bn kWh.
　　Power tariff grew 1.5% YoY to Rmb418/MWh. The average cost of power output dispatch fell 3.4% YoY to Rmb367.7/MWh. In 1H23, transportation turnover of self-owned railways, freight shipping volume, and shipping turnover increased 3.6%, 9.7%, and 22.4% YoY.
　　In 1H23, net operating cash inflow fell 20.6% YoY to Rmb46.35bn, and capex reached Rmb16.81bn.
　　In 1H23, the effective tax rate rose 7.9ppt YoY to 19.8%, mainly because some of the firm’s coal subsidiaries overpaid corporate income tax to offset tax payable in 1H22
　　Trends to watch
　　Continued to apply for mining in additional regions; increasing reserves and output to consolidate coal business. According to the　firm's interim report, in 1H23, the environmental assessment report of Xinjie No. 1 Mine has been approved by China’s Ministry of Ecology and Environment. The acquisition of resources in the expanded areas of the Shangwan Coal Mine and Bulianta Coal Mine in Shendong Mines has been progressing in an orderly manner. The production capacity of Lijiahao Mine has increased 2mnt/year to 8mnt/year and has passed the on-site verification by the State Administration of Mine Safety.
　　The firm has been promoting power transformation while enhancing　coal-fired power supply. The firm added 52MW of installed capacity for photovoltaic power generation in 1H23. In addition, it plans to commission in 2H23 six highly efficient clean coal power units with a total installed capacity of 4,700MW. We are upbeat on he further optimization and expansion of the firm's power business.
　　Financials and valuation
　　We keep our 2023 and 2024 earnings forecasts largely unchanged. A- shares are trading at 9.0x 2023e and 8.7x 2024e P/E, and H-shares at 5.8x 2023e and 5.4x 2024e P/E. We maintain OUTPERFORM ratings and our target prices for A-shares and H-shares. Our A-share TP implies 10.5x 2023e and 10.2x 2024e P/E with 16% upside, and our H-share TP implies 6.6x 2023e and 6.1x 2024e P/E with 13% upside.
　　Risks
　　Recovery in demand disappoints; adjustment of benchmark prices for medium- and long-term contracts.
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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。