CHINA COAL ENERGY(601898)：ASSET IMPAIRMENT WEIGHS ON EARNINGS;CORE PROFIT REMAINS SOLID

　　2022 results miss our expectations
　　China Coal Energy announced its 2022 results: Revenue dropped 8% YoY to Rmb220.6bn. H-share attributable net profit rose 30% YoY to Rmb19.7bn, implying EPS at Rmb1.49 (up 30% YoY). A-share attributable net profit came in at Rmb18.2bn, and recurring attributable net profit rose 34% YoY to Rmb18.1bn. We believe earnings increased thanks to higher coal prices and investment income. We attribute the divergence in H-share and A-share earnings to different domestic and overseas accounting standards pertaining to special reserves and deferred tax adjustments.
　　In 4Q22, revenue dropped 37% YoY to Rmb45.2bn (down 21% QoQ). A-share attributable net profit came in at -Rmb1.09bn (vs. Rmb1.82bn in 4Q21). Recurring attributable net profit stood at -Rmb1.12bn (vs. Rmb1.67bn in 4Q21). We attribute the net losses in 4Q22 to substantial provisions for asset impairment.
　　Comments
　　Coal prices increased. In 2022, prices of the firm’s commercial coal averaged Rmb716/t (up 11% YoY). The average price of thermal coal rose 9.1% YoY, and that of coking coal jumped 29% YoY. In 4Q22, prices of the firm's commercial coal averaged Rmb671/t (down 16% YoY, down 2.9% QoQ).
　　Production volume of coal rose. In 2022, the production volume of commercial coal increased 4.4% YoY to 119.2mnt. The production volume of thermal coal and coking coal stood at 109.2mnt (up 5.2% YoY) and 9.98mnt (down 3.7% YoY). In 4Q22, the production volume of thermal coal dropped 11% YoY to 25.51mnt (down 15% QoQ), and that of coking coal fell 21% YoY to 1.66mnt (down 39% QoQ), due to coal mining accidents.
　　Cost of coal per tonne edged up. In 2022, the selling costs of self-produced commercial coal edged up Rmb9.14/t YoY to Rmb367/t. Factoring out transportation fees, we estimate that production costs rose Rmb12.85/t YoY to Rmb301/t, due to higher material costs (up Rmb4.15/t) and labor costs (up Rmb12.05/t). Material and labor costs increased, as fuel prices rose and the firm reduced outsourcing.
　　The production volume of coal chemical products increased 3.4% YoY to 5.67mnt in 2022.
　　Asset impairment in 2022 rose 122% YoY to Rmb8.8bn. The company made provisions of Rmb6.29bn for impairment of the Shalajida coal mine, as it could not explore this coal mine in the short term due to regulations around a nearby conservation area. The firm made a provision of Rmb753mn for impairment at Shanghai Datun Energy Resources. It also made a provision of Rmb725mn for asset impairment, citing net losses of China Coal Yuanxing. In addition, the firm made a provision of Rmb413mn and Rmb417mn for asset impairment at the Dongpo coal mine and Tangshangou coal mine, due to changes in the geological conditions of the two mines.
　　Investment income in 2022 jumped 42% YoY to Rmb5.04bn, as earnings at companies in which the firm holds stakes increased amid rising coal prices.
　　The firm estimates a dividend payout ratio of 30% for 2022, implying a dividend at Rmb0.413/sh (taxes included).
　　Trends to watch
　　2023 output, sales and capex plan: The firm expects full-year production and sales volume of commercial coal to exceed 125mnt, and production and sales volume of polyolefin and urea to surpass 1.4mnt and 1.9mnt. It expects capex to reach Rmb18.02bn (up 23% YoY), of which Rmb10.46bn will be earmarked for coal projects, Rmb3.8bn for coal chemical projects, Rmb1.88bn for power projects, and Rmb1.4bn for renewable energy projects.
　　Financials and valuation
　　We cut our 2023 EPS forecasts 12% to Rmb1.82 for H-shares and 16% to Rmb1.68 for A-shares to reflect fine-tuning of our assumptions on output, sales volume, and product prices. We introduce our 2024 EPS forecasts at Rmb1.90 for H-shares and Rmb1.76 for A-shares. H-shares are trading at 2.7x 2023e and 2.6x 2024e P/E. A-shares are trading at 4.9x 2023e and 4.7x 2024e P/E. For H-shares, we maintain an OUTPERFORM rating, but cut our TP 11% to HK$8 (3.8x 2023e and 3.6x 2024e P/E), offering 35% upside. For A-shares, we maintain an OUTPERFORM rating, but cut our target price 15% to Rmb11 (6.6x 2023e and 6.2x 2024e P/E), offering 33% upside.
　　Risks
　　Demand disappoints; supply increases more rapidly than we expected.
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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。