SHAANXI COAL INDUSTRY(601225)：COAL COST CONTROL AND EFFICIENCY ENHANCEMENT BOOST STEADY EARNINGS-格隆汇

机构：中金公司
研究员：Yan CHEN

　　1H24 results in line with our forecast
　　Shaanxi Coal Industry announced its 1H14 results: Net profit attributable to shareholders fell 8.8% YoY to Rmb10.56bn (implying EPS of Rmb1.09), and recurring net profit fell 18.0% YoY to Rmb11.18bn. The decline in earnings in 1H24 was milder than we expected, mainly because the decline in coal price was relatively modest and the cost per tonne of coal also fell.
　　In 2Q24, net profit attributable to shareholders rose 26.5% YoY and 26.9% QoQ to Rmb5.90bn, and recurring attributable net profit fell 8.4% YoY and rose 8.9% QoQ to Rmb5.83bn.
　　Comments:
　　1) Output increased slightly. In 1H24, commercial coal output rose 2.78% YoY to 86.41mnt, and sales volume rose 2.3% YoY to 131.6mnt, with sales volume of self-produced coal up 0.7% YoY to 83.39mnt. In 2Q24, commercial coal output rose 4.0% YoY and 8.4% QoQ to 44.95mnt. We expect sales volume to rise HoH in 2H24, given rising coal inventories.
　　2) Coal prices declined at a modest pace. In 1H24, the selling price of self-produced coal fell 9.5% YoY to Rmb538.2/t, and the ASP of 6,000kcal thermal coal in Yulin, Shaanxi fell 16.8% YoY.
　　3) Cost reduction. In 1H24, the full cost per tonne of raw coal fell 5.5% or Rmb16.38 YoY to Rmb281.4, with outsourcing business fee per tonne, fuel fee and related taxes and surcharges down Rmb3.07, Rmb3.04 and Rmb5.88 YoY.
　　4) Investment income in 1H24 fell Rmb281mn YoY to Rmb932mn. Gains and losses from fair value changes rose Rmb2.02bn YoY to -Rmb641mn, with gains and losses from changes in fair value of privately offered funds and securities investment financial assets at - Rmb956mn and Rmb305mn. As the firm's investment in Salt Lake becomes a long-term equity investment, we expect fluctuations in its fair value to narrow further.
　　5) Shaanxi Coal proposes interim dividend. The firm plans to distribute a cash dividend of Rmb1.09 (tax included) per 10 shares to　shareholders, totaling Rmb1.06bn in cash, equal to 10% of the attributable net profit in 1H24.
　　Trends to watch
　　The sales structure of thermal coal and chemicals supports the firm’s coal prices. Coal demand growth has been stable YTD, and demand for chemical coal still has growth momentum. Data from sxcoal.com shows that chemical coal consumption grew 12% YoY in 1H24. Given the firm’s long-term contractual sales of thermal coal and the high proportion of chemical coal, we think fluctuations in coal prices will be manageable, supporting stable earnings.
　　Strong ability to obtain resources; high-quality resources to support long-term growth. As of end-2023, the firm had 10.44bn tonnes of recoverable coal reserves with a recoverable life of more than 70 years, and most of its resources are located in high-quality coal mining areas such as northern Shaanxi.
　　In 1H24, the firm accelerated approval of wellfields in Xiaohaotu No.1 and the western exploration area. Looking ahead, we believe the firm’s excellent operating conditions and ample resources will support its sustainable development in the long term.
　　Financials and valuation
　　We cut our 2024 and 2025 earnings forecasts 10% and 6% to Rmb21.5bn and Rmb22.6bn, considering factors such as our lower coal price assumptions. The stock is trading at 10.8x 2024e and 10.3x 2025e P/E. Given the cost advantage and strong resource capability, we maintain our OUTPERFORM rating and target price, implying 12.2x 2024e and 11.6x 2025e P/E, implying 13% upside.
　　Risks
　　Demand recovery and/or project progress disappoint.