1Q17 results significantly beat consensus
China Shenhua released its 1Q17 results after market close on 28 April. Itgenerated revenue of RMB61bn, beat both DBe and street estimate byreaching 28% FY17 DBe and 36% Bloomberg consensus. Shenhua was able todeliver impressive NPAT of RMB12.9bn, beat both DBe and Bloombergconsensus by achieving 30% FY17 DBe and 41% Bloomberg consensus.
Coal: better-than-expected ASP and COGS
Gross profit generated by the coal sector arrived at RMB13bn, up 88% YoY and47% QoQ. The strong earnings of coal operation was contributed by increasesin both volume and profitability. In 1Q17, the self-produced coal and total salesof coal increased 9% YoY and 23% YoY. Unit cost decreased RMB22/t QoQand RMB7/t YoY. On the other side, 1Q17 ASP of self-produced coal hikedRMB10/t QoQ, while benchmark price QHD5500 declined RMB40/t. As 1Q17coal price was more stable than 4Q16 when coal price had a sudden spike,Shenhua was able to have better ASP realization in 1Q17. Meanwhile, theincrease of trading coal also helps to increase Shenhua's ASP.
Power: volume and profitability both improved QoQ
Power delivered RMB2bn gross profit, QoQ up 68% though YoY down 53%.Total electricity generation shipment in 1Q17 climbed 9% YoY, outperformingtotal Chinese thermal power generation at 7.4% YoY during the same period.Gross profit per mwh improved by RMB8 as unit cost decreased by RMB17, inline with market benchmark coal price trajectory in 1Q17.
Strong ROEs and cash generation; Buy reiterated
Shenhua generated OCF of RMB25bn in 1Q17, up 64% YoY. Annualized 1Q17ROEs arrived at c.13% before stripping out the effect of the upcoming specialdividend. Even at our conservative 2017 DBe NPAT, the stock is trading below10x PEx. Meanwhile, the company's to-be-distributed dividends shouldgenerate 18% cash yield in three months’ time. As such, we see our TP atHK$25, (implying c.40% upside potential and highest TP among Bloombergconsensus) as justifiable. Reiterate our Buy stance on China Shenhua.