Incident: China Shenhua achieved operating income of 343,074 billion yuan in 2023, down 0.4% year on year; net profit attributable to shareholders of the company reached 59.694 billion yuan, a decrease of 14.3% year on year; net profit attributable to shareholders of the company after deduction reached 62,868 billion yuan, down 10.6% year on year; weighted average return on net assets was 14.88%, down 3.20 percentage points year on year.

On a quarterly basis, 2023Q4 achieved operating income of 90.607 billion yuan, up 9.13% from the third quarter and a year-on-year decrease of 3.65%; the company's net profit attributable to the company's shareholders reached 11.425 billion yuan, down 23.78% from the third quarter, up 8.86% year on year; and the company achieved net profit attributable to the company's shareholders after deduction of 15.057 billion yuan, up 1.46% month-on-month compared with the third quarter.

Comment: Coal Division: Coal prices have dropped significantly, production and sales costs have risen, and profits have declined slightly. In 2023, the average sales price of the company's coal (excluding tax) was 584 yuan/ton, down 9.3% year on year; the sales prices of the company's own coal and outsourced coal were 548 yuan/ton and 679 yuan/ton respectively, down 8.2% and 13.9%, respectively. Among them, the daily sales prices of annual long-term cooperation, monthly long-term cooperation, and spot sales prices were 500 yuan/ton, 808 yuan/ton, and 640 yuan/ton, respectively, down 2.9%, 7.4% and 17.5% year-on-year respectively. The company's coal production and sales volume all exceeded the target in 2023. In 2023, the company's coal sales volume reached 450 million tons, up 7.7% year on year. In 2023, the total cost of the company's coal sales was 17,7867 million yuan, up 4.21% year on year. Among them, the sales costs of self-produced coal and purchased coal were 95,250 million yuan and 82,617 million yuan respectively, up 2.25% and 6.43% year-on-year respectively. The unit production cost of self-produced coal in 2023 was 179.0 yuan/ton, up 1.5% year on year. Among them, raw materials, labor costs, repair costs, depreciation and amortization, and other costs were 30.1 yuan/ton, 37.4 yuan/ton, 9.1 yuan/ton, 23.7 yuan/ton, and 78.7 yuan/ton, respectively. The year-on-year changes were -2.0%, -16.5%, -9.9%, 9.7%, and 13.9%, respectively. In 2023, the company's gross margin of coal sales was 32.3%, down 4.2 percentage points year on year. Among them, the gross margin of self-produced coal and outsourced coal sales decreased by 4.1 and 0.8 percentage points, respectively. In 2023, the company's coal division achieved revenue of 273.306 billion yuan, a year-on-year decrease of 1.5%. The main reason is the decline in coal sales prices, rising production costs for self-produced coal units, and rising sales costs for self-produced coal and outsourced coal, leading to a decline in profits.

Generation Division: The amount of electricity sold has increased, and profits have increased. In 2023, the company's total power generation capacity was 212.26 billion kilowatt-hours, up 11.0% year on year; the company's electricity sales volume was 19.75 billion kilowatt-hours, up 11.1% year on year.

The company's electricity sales price in 2023 was 414 yuan/megawatt-hour, down 1.0% year on year. In 2023, the company's unit electricity sales cost was 363.0 yuan/megawatt-hour, a year-on-year decrease of 4.7%. In 2023, the power generation division achieved operating revenue of 92.407 billion yuan, up 9.3% year on year; gross margin was 16.9%, up 2.6 percentage points year on year, mainly due to the fact that the company's unit electricity sales cost fell faster than electricity prices fell faster than electricity prices.

Transportation Division and Coal Chemical Division: Transportation business grew steadily, and rising costs led to a decline in gross margins of all businesses. In 2023, the company's own railway transportation turnover reached 309.4 billion tons and kilometers, an increase of 4.0% over the previous year; the company's railway division achieved operating revenue of 42,961 billion yuan, up 1.8% year on year, mainly due to the increase in its own railway transportation turnover. Operating costs reached 27.059 billion yuan, up 9.5% year-on-year, mainly due to increases in repair costs and labor costs. The gross margin of the port division fell 1.6 percentage points; due to the decline in average shipping prices, the gross margin of the shipping division decreased 9.0 percentage points year over year. In 2023, the company's coal chemical division achieved operating revenue of 6.098 billion yuan, down 4.4% year on year; gross margin was 11.2%, down 4.7 percentage points year on year, mainly due to the drop in average sales prices of polyethylene and polypropylene.

Deepen coal-power joint ventures and expand new projects, and production capacity growth is expected to continue in the future. Deepen coal-power co-operation and continue to play the role of coal and electricity backstopping. In 2023, commercial coal production and sales increased by 3.5% and 7.7%, respectively, and the annual cumulative power generation and electricity sales volume increased by 11.0% and 11.1%, respectively. In 2024, the main investment projects of the company's coal division include the construction of Xinjie 1 and 2 wells in the Taigemiao mining area of Xinjie. The total production capacity of the new project is expected to reach 16 million tons/year; the company accelerates the construction of high-quality power points and plans to invest 10.159 billion yuan in new construction projects. Guangdong Qingyuan Phase I (2x1000MW) and Hunan Yueyang Power Plant Project (2x1000MW) were put into commercial operation. Guangxi Beihai Phase II (2x1000MW) successfully started construction. Under the coal-power joint venture model, the company's new construction projects are progressing steadily, and production capacity will continue to grow in the future.

Continued high cash dividends and continued to lead the industry. In 2023, the company plans to distribute dividends of 2.26 yuan/share (tax included), with a total dividend of 44.903 billion yuan (tax included). Under Chinese corporate accounting standards, dividends account for 75.2% of net profit attributable to the company's shareholders, an increase of 2.4 percentage points over the previous year, and the high dividends are expected to continue. Based on the closing price of April 3, 2024, the dividend rate for A shares is 5.71% and the dividend ratio for H shares is 7.77%.

Company profit forecast and investment rating: We believe that the company's electricity sales business is developing at an accelerated pace, and the business situation of the power generation business continues to improve. At the same time, along with the injection of assets and the gradual commissioning of mines under construction, the company's coal business is expected to usher in an epitaxial increase in production and contribute to stable performance. The company's net profit for 2024-2026 is expected to reach 603.16/606.59/64.075 billion yuan, and the corresponding EPS is 3.04/3.05/3.22 yuan. Maintain a “Highly Recommended” rating.

Risk warning: The degree of macroeconomic recovery falls short of expectations, the reform of state-owned enterprises in the industry falls short of expectations, the industry faces the risk that effective demand is insufficient, and coal price fluctuations fall short of expectations.