A-/H-share earnings preannounced to drop 15% and 16% YoYShenhua preannounced 1H20 A- and H-share earnings may decline15% and 16% YoY to Rmb20.7bn and Rmb20.4bn, better than ourexpectations. We thus estimate 2Q20 A-share and H-share earningsmay drop 5.6% and 8.4% YoY （or, up 11.1% and 4.4% QoQ） toRmb10.9bn and Rmb10.4bn. We attribute the 1H20 earnings declinesto falling sales volume and prices, as well as a high base ofinvestment income from disposing of JV power assets. The firmestimates 1H20 A-share recurring attributable net profit may slip 10%YoY to Rmb20.4bn.
Trends to watch
2Q20 commercial coal output and sales volume falling YoY. Based onmonthly corporate filings, Shenhua’s 2Q20 commercial coal outputand sales volume were 71mnt （-3.7% YoY and -4.3% QoQ） and107mnt （-4.6% YoY and +8.6% QoQ）。 Its 2Q20 power output and salesvolume rose 28.8% and 28.5% QoQ to 35.36bn kWh and 33.05bnkWh.
2Q20 thermal coal prices declines 15.4% YoY. 2Q20 QHD thermalcoal price averaged Rmb519/t （-15.4% YoY and -7.8% QoQ）。 Giventhat annual long-term contracts, monthly long-term contracts, andspot sales accounted for 44% , 43%, and 13% of sales volume in1Q20, we estimate Shenhua’s 2Q20 average sales price fell 3.0% YoYto Rmb396/t. See page 3 for details.
Valuation and recommendation
Given Shenhua’s commercial coal output of 146mnt in 1H20, we raiseour 2020 forecasts for commercial coal output and sales volume 4.5%and 3.0% to 280mnt and 418mnt, and lift our 2020 A-share andH-share earnings forecasts 3.4% and 3.4% to Rmb41.8bn andRmb42.1bn. Maintain 2021 earnings forecast.
Shenhua A-share and H-share are trading at 7.3x and 5.4x 2020e P/E.
We maintain OUTPERFORM on A-share and H-share with TPs atRmb21 （10.0x 2020e P/E with 36% upside） and HK$18.50 （7.8x2020e P/E with 44% upside）。
Risks
Sharper-than-expected decline in coal prices.