Zhijun Finance and Economics App learned that China Shenhua (01088) held its 2024 third-quarter performance exchange meeting. China Shenhua pointed out that the company is increasing its investment in new energy, combining its own characteristics and industrial layout. Currently, the company's new energy investment planning has an installed capacity under construction and in operation exceeding 4.06 million kilowatts, with the latest commissioned data at 0.76 million kilowatts. It is expected that by the end of this year, the newly installed capacity of new energy may exceed 1 million kilowatts. Although the proportion of total assets and revenue is relatively low, this represents the company's positive breakthrough in green transformation and the joint operation of traditional and new energy.

In addition, the company is increasing its investment to consolidate its integrated advantages and resource continuity, actively promoting green development and transformation. The company's board of directors convened a strategic workshop at the end of last month, summarizing the 14th Five-Year Plan and arranging the 15th Five-Year Plan. The company is advancing several major projects, including the construction of Xinjie Well No. 1, Well No. 2, and the Xinjie Taigongtemple Mining Area, expected to start production in 2028, adding an annual capacity of over 16 million tons. Furthermore, the company also has projects under construction in railways, ports, and high-efficiency thermal power, overall, the company's coal and electricity operation and chemical sector will be further consolidated and enhanced.

Q&A

Q: How did the company's coal and power sector costs perform in the first three quarters? Will the fourth quarter maintain the same level as the third quarter, and what is the annual cost guidance?

A: In the first three quarters, the unit cost of the company's self-produced coal decreased by 2.5% year-on-year, and the unit power generation cost also decreased. The main reasons for the cost reduction include strengthening cost control, the impact of production characteristics and market changes, and cost progress arrangements in the management process. The overall cost level is expected to increase slightly year-on-year, but will be controlled within the annual 10% guidance. In the fourth quarter, efforts will continue to be made to strengthen cost control, striving for better performance in cost management.

Q: Can the annual cost trend of the power sector continue the performance of the first three quarters?

A: The overall cost trend of the power sector can continue the trend of the first three quarters, but the current biggest challenge lies in the utilization hours and electricity prices. The profit of the power sector in the first three quarters decreased year-on-year, mainly due to the decrease in electricity prices and reduced utilization hours. This is related to the construction of the national new energy system and the development of low-carbon transformation. Nevertheless, the cost of the power sector can still maintain a good trend.

Q: The company's labor costs fluctuate significantly between annual and quarterly periods, what is the outlook for future labor costs? Will they remain stable or gradually increase?

A: Labor costs account for a significant proportion of the self-produced coal costs, and their fluctuations are mainly influenced by the progress of provisions, quarterly and annual performance payment arrangements, as well as board of directors' performance considerations. We expect the level of labor costs for the whole year to remain basically consistent with last year, but due to changes in performance and production situations, there may be some fluctuations and adjustments. However, we are confident in controlling costs within the annual guidance range.

Q: What updates are there for the company's dividend plan and cash flow management in the next three years? Is repurchase being considered?

A: The company's dividend policy has always been stable, committing to a dividend ratio of not less than 60%. The dividends for 2022 and 2023 were 72.8% and 75.2% respectively, far exceeding the commitment level. The company is formulating a new three-year dividend plan, soliciting opinions from shareholders and the market, considering market cap management and regulatory requirements. The company's operating cash flow is performing well with sufficient funding assurance. In the future, it will continue to provide stable cash flow and high shareholder returns, study dividend frequency and other arrangements, ensuring long-term sustainable shareholder returns.

Q: What specific arrangements does the company have in terms of resource consolidation and industrial transformation?

A: The company is increasing its investment to consolidate its integrated advantages and resource succession, actively promoting green development and transformation. The board of directors held a strategic workshop at the end of last month to summarize the 14th Five-Year Plan and make arrangements for the 15th Five-Year Plan. The company is advancing several major projects, including the construction of Xinjie 1 Well, Xinjie 2 Well, and Xinjie Tai Gongmiao Mine area, expected to start production in 2028, adding a capacity of over 16 million tons per year. In addition, the company also has projects under construction in railroads, ports, and high-efficiency thermal power, overall, the company's coal, power, and chemical sector will be further consolidated and improved.

Q: How is the company's investment situation in new energy?

A: The company is intensifying its investment in new energy according to its characteristics and industrial layout. Currently, the company's new energy investment plan has an installed capacity of over 4.06 million kilowatts under construction and operation, with the latest commissioned data being 0.76 million kilowatts, expecting the new energy installed capacity to exceed 1 million kilowatts by the end of this year. Although the proportion of total assets and revenue is relatively low, this represents the company's positive breakthrough in green transformation and the coexistence of traditional energy and new energy.

Q: Has the effective tax rate for the company decreased in the first three quarters, and is it expected to increase seasonally in the fourth quarter of this year? Is this related to impairment?

A: The company's income tax rate is summarized and merged due to the nature of the group, enjoying multiple tax incentives, especially the western development policy, which results in a tax burden lower than the national statutory tax rate. Quarterly fluctuations are a normal phenomenon, and the overall tax rate level should remain consistent. During the financial closing in the fourth quarter, pre-settlements will be made to truly reflect the tax burden level, which may cause quarterly fluctuations. Overall, the company pays taxes in accordance with the law, actively implements tax incentives, and provides good support for compliant operations and profitability.

Q: What factors affect the company's tax rate changes? Will there be significant changes in the overall comprehensive tax rate for the year?

A: The company's comprehensive tax rate remains relatively stable throughout the year and will not undergo significant changes. Quarterly tax rate changes are mainly influenced by the profit structures of different business sectors, such as changes in the coal and electrical utilities sector. In addition, changes in the profit share of coal production units benefiting from western development incentives will also affect the tax rate. Additionally, the progress of the annual final settlement in May will also impact quarterly tax rates.

Q: Will impairment affect the tax rate?

A: Impairment does indeed affect the tax rate, but usually not significantly. The impairment assessment process takes place in the fourth quarter, and the annual changes are not substantial.

Q: Is there a possibility of an increase in taxes and fees for coal production? In which specific areas could there be an increase?

A: As the trend suggests, taxes and fees for coal production may show an upward trend, especially in areas such as resource conservation, waste disposal, safety production, and abandoned mine restoration. The country has strict regulations and requirements in these areas, and the characteristics of resource products determine their environmental impact during the development process. Despite green mine construction and intelligent mining reducing environmental impacts, taxes and fees to ensure environmental protection and safety may still increase. The company will continue to pay taxes in accordance with the law, fulfill social responsibilities, and actively seek tax incentives.

Q: How does the change in coal prices affect China Shenhua's profitability? If coal prices fall or rise, how will the company's profitability change?

A: The company's profitability is closely related to fluctuations in coal prices. Self-produced coal is the main source of the company's performance, while purchased coal affects overall coal volume and transportation revenue. Fluctuations in coal prices directly affect generation costs, thereby significantly impacting the company's performance. This year, after an initial drop, coal prices rebounded, with overall sales prices decreasing by about 3% year-on-year, leading to a reduction of over 30 billion yuan in profits for the coal sector. However, due to the company's integrated operations, the impact of coal price fluctuations on overall performance is limited. Despite market coal prices dropping by over two digits, China Shenhua's performance fluctuation is the smallest among comparable coal companies. Long-term contracted coal accounts for over 80% of the company's coal supply, limiting the impact of spot price decreases. Furthermore, the decrease in coal prices is beneficial for the profitability growth in the thermal power sector. The transportation sector is minimally affected by coal price fluctuations, as its revenue is based on transport volume and unit freight rates. Overall, the impact of coal price fluctuations on the company's performance is manageable, and the company has strong response capabilities.

Q: What are the specific changes in coal prices this year? How do they affect the company's purchased coal business?

A: This year, long-term contracted coal prices dropped by about 13 yuan, currently maintained at around 699 yuan, accounting for 80% of the company's coal structure, remaining stable. The spot coal price is approximately 860 yuan, nearly 100 yuan lower year-on-year. The downward trend in prices led to a decrease in profit from purchased coal transactions, but purchased coal increased by about 10%, reaching 10 million tons. The company promotes growth in purchased coal through a strategy that links quantity and price, with increased traffic volumes at Huanghua Port and Huangshuang Line. In the third quarter, the pricing of purchased coal was basically in line with market indices, slightly higher than market indices. Overall, the company has implemented a strategy of trading quantity for price in its purchased coal business.

Q: What is the supply and demand situation in the coal market for the fourth quarter? What are the expectations for the purchased coal business?

A: The coal supply is relatively ample in the fourth quarter, with the total annual raw coal output expected to reach 4.7 billion tons, and coal imports exceeding 0.5 billion tons. On the demand side, with a predicted colder winter, there will be higher coal storage demand, and JD.com's demand will surpass the peak summer level. The growth in new energy is slowing down, and the supply-demand situation is expected to improve compared to the summer. Purchased coal is expected to continue growing in the fourth quarter, with a potential for good growth despite price declines.

Q: What are the expectations for the coal market next year?

A: Next year, the macro economy is expected to benefit from a series of incremental policies, with coal production expected to be maintained at 4.7 billion tons and coal imports exceeding 0.5 billion tons. Without major policy intervention, coal supply will remain high. The enhanced effect of new energy substitution is expected to significantly lower the central range of coal prices. Overall, coal prices are expected to continue to decline next year, but the company will respond to market changes by strengthening its core operational capabilities and management levels.

Q: What is the reason for the decrease in the sales volume and proportion of long-term coal contracts in the first three quarters of this year? How will the volume and proportion of long-term coal contracts change compared to last year for the whole year?

A: Last year's policy required a 100% signing of long-term contracts, with a 100% fulfillment rate, hence the high proportion of long-term contracts. This year, the guidance from the National Development and Reform Commission (NDRC) has adjusted to an 80% signing of long-term contracts, and the downward movement of market prices has led to a decrease in the proportion of long-term contracts, but still leading in the industry. It is expected that the volume and proportion of long-term coal contracts for the whole year will decrease.

Q: What changes can be expected in the signing requirements of long-term coal contracts compared to this year for next year?

A: Currently, we are awaiting guidance from the NDRC on the policy for 2025 and have not yet received any relevant information. We will closely monitor policy changes in order to adjust the signing strategy of long-term coal contracts in a timely manner.