Beat Bloomberg consensus strongly with 143% YoY NPAT hike for 1H17Shenhua announced its 1H17 results on 25 August. Its revenue arrived at RMB120.5bn, up 53% YoY and 15.4% HoH, achieving 51% FY17 DBe and 55%Bloomberg market consensus. Bottom line at RMB26.3bn, up 143% YoY andup 86.7% HoH, representing 53% FY17 DBe and 71% market consensus. 1H17results demonstrates consensus much behind while in-line with DBe. Shenhuahas announced 1H17 profit alert on 28 July. Currently Bloomberg consensusstill behind DBe by 34%/35% for 2017/2018.
　　Coal: better-than-expected ASP with production cost cutsCoal segment demonstrated decent improvement for ASP and sales volume.
　　2Q17 coal ASP climbed by RMB10/t QoQ to RMB430/t while benchmark priceQHD5500 declined by RMB7/t, reflecting better price realization ability in 2Q17.
　　1H17 trading coal sales volume went up 18% HoH driven by high coal price,albeit self-produced coal volume largely flat HoH. Unit coal cost dropped byRMB10/t QoQ to RMB94/t in 2Q17, thanks to raw material and labor expensereduction. In our view, 2H17 coal S/D in China should remain resilient and thusbelieve Shenhua's strong profitability will continue into 2H17.
　　Above China average power growth and extensive growth for logisticsPower output dispatch enjoyed 10% YoY increase at 114.4bn kWh in 1H17,above China total social thermal power generation hike of 7.1%. Logisticdivision had extensive growth in the reporting period. Self-owned railwayturnover up 14% YoY and railway turnover for external clients enjoyed 38%YoY. In 2H17, Shenhua should be able to enjoy some ASP improvement for itspower generation business after the on-grid power tariff hike, in our view.
　　Meanwhile, Shenhua's continuous efforts to grow its logistic businesses seemto be able to sustain its high growth in the division and improve the utilizationrate of its transportation facilities.
　　Impressive cash generation and ROAE
　　1H17 operating cash flow improved 9% HoH to RMB46.6bn, and RMB97bncash on book at 1H17 period end nearly doubled that of FY16 year end. Netgearing dropped substantially to 1.7% at 1H17 period end from 14.3% in FY16year end. The company’s impressive cash generation ability is higher than ouroriginal expectation. Even with FY17 budgeted capex at RMB35bn, FCF yieldshould at still be as high as 15%+. Meanwhile, Shenhua's annualized ROE in1H17 should be approaching 20%.
　　Guidance fine-tuned, 15%+ ROAE and FCF yield expected; BuyThe company revised FY17 coal production volume to 2.78mt from 2.98mt,and increased power dispatch to 229bn kWh. The company also fine-tuned itsFY17 guidance for top line and COGS at RMB221.5bn and RMB150bn, largelyin line with FY17 DBe. With a strong ROAE and FCF yield both over 15% inFY17 and the outlook into 2018 remaining positive (details in our recent sectornote – Higher for longer, re-iterate Buy on coal sector, published on 26 July),we believe the company currently trading at 1x PB FY17DBe is veryundemanding. Buy reiterated.