1Q19 recurring earnings in line
China Shenhua-H announced 1Q19 results: Revenue declined 9.5%YoY to Rmb57bn. Attributable net profit rose 5.4% YoY or 86% QoQto Rmb12.9bn or Rmb0.65/sh. Shenhua-A’s attributable andrecurring attributable net profit were Rmb12.6bn （+8.2% YoY and+46.5% QoQ） and Rmb11.3bn （-2.5% YoY）。 Recurring earnings are inline with our expectation. Coal price declined YoY in 1Q19, butearnings continued to grow YoY thanks to rising investment incomeand falling financial expenses.
Comments: 1） Commercial coal production dropped 0.8% YoY and6.7% QoQ to 71.5mnt in 1Q19. 2） Coal ASP was Rmb411/t, down6.7% YoY （versus 14% YoY decline in QHD 5500 market price） anddown 2.7% QoQ （versus the 4% QoQ decline in QHD price）。 3） Unitproduction cost of self-produced coal rose 8.8% YoY to Rmb121.4/t.
4） Net finance costs declined 47% YoY or Rmb393mn. 5） Gross powergeneration/sales slipped 30%/30% YoY as Shenhua does notconsolidate the JV with GD Power. 6） Investment income roseRmb1.37bn due to establishing JV and recognizing investment gain ofRmb1.1bn. 7） OCF was up 1.6x to Rmb31bn, or up 81% to Rmb24bnexcluding impact of Shenhua Finance Company.
Trends to watch
Balance sheet remains solid. As of end-1Q19, net cash had increasedRmb23bn to Rmb68bn compared with end-2018. Net cash accountedfor 17% of equity at end-1Q19.
Earnings forecast
Maintain 2019-2020 EPS forecast at Rmb2.30 and Rmb2.32 forShenhua-A, and Rmb2.32 and Rmb2.37 for Shenhua-H.
Valuation and recommendation
Shenhua-A is trading at 8.5x and 8.4x 2019-2020e P/E, andShenhua-H at 6.7x and 6.5x. Maintain HOLD for Shenhua-A/-H andTP at Rmb20 （8.7x an 8.6x 2019-2020e P/E with 2% upside） andHK$19 （7.2x and 7.1x 2019-2020e P/E with 8% upside）。
Risks
Disappointing coal demand and/or coal prices.