Due to the decline in coal prices, 1Q24 profit fell 14.7% year on year, but the non-coal sector performed well
In 1Q24, China Shenhua's net profit fell 14.7% year on year to 15.88 billion yuan, mainly hampered by the decline in coal sector profits due to falling coal prices. However, the advantages of the company's integrated coal, electricity, port and shipping partially offset the decline in profits in the coal sector. Total profit in the 1Q24 electricity transportation and coal chemical sectors increased 14.9% year on year. In particular, profit in the transportation sector increased 17.7% year on year. The successful operation of the 30,000 ton heavy duty train of the Shuohuang Railway has had a major impact on improving the capacity of China's energy transportation corridors. We believe that the business model of the company's high cooperation ratio and integrated operation will effectively reduce the impact of fluctuations in coal prices on the company's profits and help maintain a high dividend ratio. We expect the electricity consumption of the whole society to grow more than expected in the second half of the year or drive a recovery in coal prices. Based on the upward coal price assumption, we will adjust the 2024-26 EEPS to 3.13/2.98/2.79 yuan (previous value: 2.99/2.77/2.67 yuan), and slightly increase the target price of H/A shares to HK$36.8 (10.7x2024E EPS). Over the past ten years, the company's average PE premium rate increased by 30% to reflect the increase in the overall premium rate of stable and high-dividend stocks) and 46.7 yuan (compared to Hong Kong shares for A shares) and 46.7 yuan (compared to Hong Kong shares), and A/H premiums have been the same since 2020; previous value: HK$35.1/$44.6). Maintain “buy-in.”
Due to the stable volume and price decline in the coal sector, sector profits declined year-on-year
1Q24 coal sector production increased slightly by 1.5% year on year, but fell slightly by 1.5% month-on-month to 81.3 million tons. We expect the company's coal production to remain at the level of 810-83 million tons in the next few quarters. Construction will continue to be promoted at Xinjie No. 1 and No. 2 (approved production capacity of 16 million tons/year), while the parent company assets being acquired, Dayan Mining and Hangjin Energy (operating and under construction with a total of 20.7 million tons/year) will boost future production. The unit price of coal sales fell 7.7% year on year to 573 yuan/ton due to the decline in market prices, and the production cost per unit of coal production increased by 12.5% year on year to 190.6 yuan/ton, mainly affected by last year's low base. The sector's profit fell 23% year on year to 13.41 billion yuan due to adverse effects on prices and costs, but the sector's profit was basically stable from month to month.
Favorable changes in the cost and volume of electricity in the electricity sector offset the impact of falling electricity prices, driving the year-on-year increase in profits in the power sector. The power sector benefited from the commissioning of new generator sets last year. Both power generation and electricity sales increased 7% year on year in 1Q24. At the same time, the decline in coal prices also drove the company's unit power generation cost down 3.0% year on year. Although the unit electricity sales price fell 2.5% year on year to 0.41 yuan/kWh, favorable changes on the cost side and electricity side offset the adverse effects of the decline in electricity prices, driving sector profits up 11.1% year over year to 3.19 billion yuan, partially offsetting the decline in profits in the coal sector. The company currently has a total of 6,800 MW of units under construction and 2,640 MW of units to be built, including Guangdong Qingyuan Power Plant Phase II and Guangxi Beihai Power Plant Phase II expansion, etc. The continued expansion of the power sector is expected to better form a role in business integration and complementary profits.
Risk warning: The decline in coal prices has exceeded expectations, and the cost of coal production is higher than expected.