1H23 results beat our expectations Shougang Fushan Resources announced its 1H23 results: Revenue fell 26.2% YoY to HK$3.44bn and net profit attributable to shareholders declined 23.3% YoY to HK$1.23bn (or HK$0.24/sh), beating our expectations, mainly thanks to smaller-than-expected decline in coking coal prices and higher-than-expected clean coking coal washing rate.
Clean coking coal output and washing rate increased. In 1H23, output of raw coking coal fell 1.5% YoY to 2.66mnt, while that of clean coking coal rose 6.9% YoY to 1.86mnt. Raw coking coal output accounted for 51% of the annual approved capacity, and the firm had 100% of its raw coal washed. The clean coking coal washing rate rose 5.5ppt YoY to 69.9%.
Sales volume of clean coking coal rose 2.9% YoY to 1.79mnt.
Coal ASP declined. In 1H23, the ASP of clean coking coal fell 22% or Rmb548/t YoY to Rmb1,973/t (tax inclusive), and that of Liulin No.4 and No.9 coking coal fell 29% and 33% YoY. Thanks to long-term coal contracts that previously secured coal prices, the firm saw smaller selling price declines than the market. The proportion of No.1 clean coking coal in total sales volume fell 3ppt YoY to 24%.
Per-tonne cost fell. In 1H23, the production cost of raw coking coal fell 4.3% or Rmb18/t YoY to Rmb400/t, with cash cost down Rmb18/t YoY to Rmb326/t, as uncontrollable costs (e.g., resource tax) fell Rmb20/t YoY to Rmb90/t. Excluding these costs, the firm's cash cost rose Rmb2/t YoY to Rmb236/t.
Interest income rose HK$37.12mn YoY to HK$83.75mn in 1H23 amid rising market interest rates. Net operating cash inflow rose HK$841mn YoY to HK$2.72bn in 1H23. As of 1H23, the firm had about HK$9.42bn of free cash resources (or HK$8bn excluding HK$1.42bn of cash used to pay the 2022 final dividend).
The firm plans to pay an interim dividend of HK$0.10 (vs. interim dividend of HK$0.15 in 1H22), implying a dividend payout ratio of 41% and an interim dividend yield of 4.42% at the current share price.
Trends to watch Coal output to decline in 2H23; foresee ASP support. We expect the firm's coal output to decline in 2H23 as it shifts Xingwu Coal Mine fro upper to lower coal seams. Since July, the ASP of Liulin No.4 and No.9 coking coal have fallen 7% and 6% from 1H23 to Rmb1,944/t and Rmb1,738/t. The prices only saw moderate declines, mainly because hot metal output remained relatively high, and coking plants and steelmakers replenished inventories as needed. Looking ahead, we think it still takes time for downstream demand to improve, leading to limited growth in demand for coking coal.
However, we think the supply of high-quality coking coal has remained tight. The output of clean coking coal edged up 0.5% YoY over January- July and the imports of Australia's coking coal were only 1.19mnt over the same period (vs. 28.59mnt in the same period in 2020). In addition, the costs of coking coal imports were higher than that of domestic coking coal purchases. We think high-quality coking coal still has price support.
Financials and valuation
Due to changes in price assumptions, we raise our 2023 and 2024 EPS forecasts 11% and 14% to HK$0.38 and HK$0.37. The stock is trading at 6.0x 2023e and 6.1x 2024e P/E. We maintain OUTPERFORM and raise our target price 12.5% to HK$2.70, implying 7.2x 2023e and 7.3x 2024e P/E, offering 19.5% upside.
Risks
Disappointing recovery in downstream demand; sharper-than-expected increase in supply.