1H17 net income of RMB26.3bn, up 143% y-o-yGuides 9M17 net income to increase more than 100% y-o-yBuy with unchanged target price of HKD26.3Interim result indicates a better-than-expected 2017: Shenhua announced 1H17net profit of RMB26.3bn, up 143% y-o-y and in line with the company’s earlier profitalert. It also expects 9M17 net profit to increase more than 100% y-o-y, which implies9M17 net profit of at least RMB36.0bn (vs our full-year forecast of RMB39.3bn andBloomberg consensus full-year forecast of RMB37.1bn). Looking ahead to 2H17, weexpect coal prices to be well supported as a result of slow supply growth andcontinued strong demand, especially in 4Q which is seasonally strong for coaldemand and prices (please see China coal sector: Higher prices, favourablevaluations, 28 June). We therefore think the 1H17 results and 9M17 profit guidanceindicate a much stronger-than-expected full-year 2017.
　　A favourable macro environment: Management cited strong coal prices and robustpower demand as the main reasons for the good results. During 1H17, the averageQHD 5500 kcal coal price was cRMB600/t, up c60% y-o-y. National thermal powergeneration was 2221bn kwh, up 7% y-o-y. The company believes the coal market isrelatively balanced, and factors such as environmental protection and safetyinspections may result in supply tightness in certain regions, especially duringsummer and winter peak seasons.
　　The company also made some adjustments to its operational targets: It cut itsfull-year commercial coal production target to 2.78bt (previously 2.98bt), as a result ofthe suspension and reduction of production in Ha’erwusu and Baorixile open-pitmines. It increased its total power dispatch to 229bn kwh (previously 214.7bn kwh) asa result of the higher-than-expected growth rate of power consumption in China.
　　Valuation and risks: We keep our Shenhua H-share target price unchanged atHKD26.3 and maintain our Buy rating. Our TP is based on DCF using the followingunchanged parameters: cost of capital of 10.5%, adjusted beta of 1.15 measuredagainst the HSCEI, risk-free rate of 2.5%, market risk premium of 6%, and terminalFCF growth after 2045 of 0%, and assuming the company remains in a net cashposition in the long run. Our H-share target price implies 17% upside from the currentshare price, and we rate the stock Buy given our strong coal price outlook.
　　Key downside risks to our view on the H-shares include weaker-than expected coalprices or power tariff, delays in supply-side rationalisation beyond our currentassumptions, weaker-than-expected reduction in cost of coal and power production,and slower or higher-cost development of new projects than we now forecast