2023 results in line with our expectations

Shougang Fushan Resources (Shougang Fushan) announced its 2023 results: Revenue fell 28% YoY to HK$5.891bn, and attributable net profit slid 30% YoY to HK$1.889bn, implying EPS of HK$0.38. In 2H23, revenue came in at HK$2.449bn and attributable net profit fell 41% YoY and 47% HoH to HK$657mn. The firm's results are in line with our expectations, and we attribute the earnings decline to lower coal prices and sales volume.

Coking coal prices fell. The average selling price of clean coking coal fell 20% YoY to Rmb1,932/t (VAT included) in 2023, and the average market prices of Liulin #4 and #9 coking coal slid both 20% YoY to Rmb2,164 and Rmb1,948/t in 2023. In 2H23, the average selling price of clean coking coal fell 17% YoY and 5% HoH.

Stable output and declined sales volume: In 2023, the firm’s raw coal

output remained flat YoY at 5.25mnt, and clean coking coal output rose 0.6% YoY to 3.25mnt. The firm had 100% of its raw coal washed. The clean coking coal washing rate rose 0.4ppt YoY to 61.9%. Sales volume fell 7% YoY to 3.1mnt, with #4 and #9 coal accounting for 28% and 72%.

Unit production cost declined. In 2023, the firm’s production cost of raw coal dropped by Rmb3 YoY to Rmb401/t. The production cost fell by Rmb11 YoY to Rmb216/t after deducting depreciation, amortization and uncontrollable costs (resource taxes, etc.), mainly thanks to YoY decline in material costs and maintenance costs.

Selling expenses fell 38% YoY to HK$215mn in 2023, mainly thanks to

lower logistics fees due to declined sales volume of clean coal and lower sales volume of products transported through railway.

As of end-2023, the firm had about HK$8.032bn of free funds available for use. 2023 dividend payout ratio declined, but dividend yield remained

high. The firm plans to pay a 2023 final dividend of HK$0.18/sh (vs. an interim dividend of HK$0.10/sh). Based on the total amount of dividends paid, we estimate the firm’s 2023 dividend payout ratio likely dropped 7ppt YoY to 73%. Meanwhile, we estimate that its 2023 dividends imply a dividend yield of 10.1% (based on closing price on the date of the 2023 results announcement).

Trends to watch Selling prices resilient; short-term disruption to output. Coking coal

demand is under short-term pressure as downstream industries continue to suffer losses and their capacity utilization rate has declined.

However, we remain upbeat on the firm’s high-quality main coking coal business for two reasons. First, we expect the scarcity of high-quality main coking coal with stronger strength to become more prominent amid increasing applications of large blast furnaces. Second, we believe supply could be limited. The output of Shanxi, a core producer of high-quality main coking coal, could be constrained amid tightening safety regulations, in our view. Meanwhile, we think the growth potential of Chinese imports of high-quality main coking coal from Australia is relatively limited.

Therefore, we believe prices of high-quality main coking coal have limited downside, despite short-term drag from weak demand. We believe the firm's coal selling prices are resilient. However, Xingwu Coal Mine is scheduled to shift its production from upper coal bed to lower coal bed in 1H24. We believe this may weigh on the firm's output and suggest keeping an eye on the firm’s production.

Financials and valuation

We remain our 2024 earnings forecast unchanged and introduce our 2025e earnings forecast of HK$1.998bn. The stock is trading at 7.0x and 6.6x 2024e and 2025e P/E. We maintain an OUTPERFORM rating. We raise our target price 11% to HK$3.00 (7.9x and 7.4x 2024e and 2025e P/E; 12% upside), as we think the firm, a high-dividend name, may benefit from the coal sector’s valuation expansion amid rallies driven by high- dividend theme.

Risks

Disappointing demand recovery; larger-than-expected increase in industry supply; slower-than-predicted output recovery.