3Q19 results beat expectation
China Shenhua Energy’s 3Q19 revenue totaled Rmb61.5bn （-7.8% YoYand +3.6% QoQ）； A-share attributable net profit reached Rmb12.8bn（+4.4% YoY and +10.2% QoQ）， and H-share attributable net profitequaled Rmb12.0bn （-5.3% YoY and +5.6% QoQ）。 3Q19 earningsimproved QoQ, beating our expectation thanks to rising coal ASP anda QoQ drop in effective tax rate. End-3Q19 special reserves declinedRmb922mn QoQ.
While QHD5500kcal thermal coal price declined 3.8% QoQ,Shenhua’s 3Q19 coal ASP rose 6.5% QoQ as ASP of long-termcontracts climbed 10% （or Rmb37/t QoQ） to Rmb404/t. 3Q19commercial coal output fell 7.0% QoQ and 7.4% YoY to 68.70mnt.
Unit cost of self-produced coal stayed flat QoQ at Rmb105/t in 3Q19,and fell Rmb2 YoY in 1-3Q19. 3Q19 power output and sales volumerose 10% and 10% QoQ. Effective tax rate fell 6.7ppt QoQ to 18.2% in3Q19, and declined 1.3ppt YoY to 20.4% in 1-3Q19, thanks to risingprofit contribution from the railway business.
Trends to watch
Net cash still strong. End-3Q19 net cash （including negotiablecertificates of deposit） fell Rmb3.7bn QoQ to Rmb77.4bn as Shenhuapaid Rmb17.5bn （before tax） in end-2018 dividends on July 8. Netcash’s proportion to net assets was 19%.
Financials and valuation
Given that 3Q19 results beat expectations, we raise our 2019earnings forecasts for Shenhua-A by 3.1% to Rmb47.1bn and forShenhua-H by 2.9% to Rmb47.5bn, but maintain 2020 earningsforecasts at Rmb46.1bn and Rmb47.2bn, respectively.
The H- and A-shares are trading at 5.9x and 7.9x 2020 P/E. For theH-shares, we maintain an OUTPERFORM rating and TP of HK$25.00（9.4x 2020 P/E）， offering 59.2% upside from the current price. ForA-shares, we maintain an OUTPERFORM rating and TP of Rmb28.00（12.1x 2020 P/E）， offering 53.3% upside from the current price.
Risks
Disappointing coal prices and/or coal demand.