Shenhua’s net profit dropped 11% YoY to RMB64.6bn in 2023 under IFRS, in line with its earnings alert. The fall in earnings was mainly due to the decline of ASP of its coal and the lower profit from its railway segment. Looking ahead, we expect its earnings to drop 4% YoY in 2024 on expected further decline in domestic coal prices. We trim our 2024/25 earnings forecasts by 5%/4%. We reiterate our BUY call on its H shares with target price lowered to HK$32.91.

In 2023, the operating profit of its power segment surged 40% YoY to RMB12.5bn under IFRS (same below) on 11% YoY growth in power dispatched and higher margin. However, it was more than offset by the 9% YoY fall in operating profit of the coal segment (to RMB67.7bn) mainly on a 9% YoY fall in ASP of its coal and the 15% YoY drop in the operating profit of its railway segment (to RMB11.5bn) on higher costs.

For 2024, the company guides for 3% YoY fall in both coal output and coal sales volume and 2% YoY growth in power generation. We think these targets are overly conservative, especially given that the two new power plants which commenced operations in late 2023 have boosted its total installed capacity by 10%. According to its operational data, its commercial coal output, coal sales volume and power generation grew 1% YoY, 13% YoY and 13% YoY respectively.

The company maintained its dividend payout ratio at 70% for 2023. Its planned capex drops 12% YoY to RMB36.8bn for 2024. We expect the capex of next few years to stay at similar levels as it will start construction of two new coal mines, five power generation projects and the upgrading of Baotou coal-to-olefin project. This could limit the company’s capacity to raise payout.

Having said so, the company remains a good yield play with highly resilient earnings and expected dividend yield of around 8% in coming two years.

Key Risks for Rating

Higher-than-expected costs.

Lower-than-expected profit from new power plants.

Valuation

We lower our target price for its H shares from HK$33.39 to HK$32.91 to reflect the small cuts in our earnings forecasts. Our target valuation remains at 1.41x 2024E P/B.

We raise our target price for its A shares from RMB40.70 to RMB41.07. We still set our target price based on its 3-month average A-H premium which has expanded from 33% to 35% since late January 2024.