Shenhua announced special dividends; significant positive signal to the market
Shenhua announced 2016 detail results after market close on 17 March. Whilethe results were generally as good as expected, the most critical surprise wasShenhua’s special dividend announcement. Overall cash dividend yield(including special and normal dividends) will be 20% at HK$16.5, closing price17 March. We believe this will trigger a re-rating of Shenhua because ofrealization of concrete shareholder returns and ROE improvement due to itsbook value reduction. We raise our target price 18% to HK$25; reiterate Buy.
Special dividend at RMB2.51/share means more than just dividend yield
Based on Shenhua’s announcement, special dividend at RMB2.51/share andnormal dividend at RMB0.46/share will translate to a 20% dividend yield. Webelieve a more important signal conveyed from the special dividend isShenhua’s willingness to generate concrete returns to shareholders. High freecash yet low payout and deteriorating ROE have worried investors sinceShenhua’s growth opportunities saturated. With this special dividend,investors will be able to set aside concerns and assess Shenhua’s high FCFfairly to unlock the valuation discount it used to have.
Operational results in-line; transportation contribution approaching 40%
The company’s IFRS-based NPAT was RMB183bn, up 3% YoY, achieving 99%of consensus and 99% of 2016 DBe. Compared to Shenhua’s preliminarybottom-line announced on 25 Jan, we got more clarity that RMB2.8bn losseswere from impairments. As such, we might have overestimated the scale ofproduction cost hike. The other key highlight of the results is the approaching40% profit contribution from the transportation segment. As we explained inour recent report, “QHD premium widens once more’, 16 March 2017, wethink Shenhua’s transportation value will further appreciate and might beundervalued by investors.
Raising TP to HK$25; Buy reiterated. Major risk: serious macro deterioration
Factoring 2016 results into our forecast trajectory, we further raise 2017DBeNPAT by 4%. After the special dividend distribution, Shenhua’s book value willbe reduced by c.15% and thus Shenhua’s ROE in 2017 should lift to 12%. Weset Shenhua’s new target price based on PBx/ROE valuation, increasing by18% to HK$25. With 52% upside potential, we reiterate Buy. At our new TP,Shenhua’s FCF yield would remain at c.9% above in 2017-218E. Major risk:serious macro deterioration.