Preannounced 2021 attributable net profit up at least 122% YoY
　　Shougang Fushan Resources has preannounced that its attributable net profit grew at least 122% YoY to more than HK$2.4bn in 2021. The preannounced results beat our expectation, thanks to a significant rise in the sales prices of coal products, sound cost control and renminbi appreciation against Hong Kong dollar. Based on the preannouncement, we estimate that 2H21 attributable net profit increased more than 225% YoY or 156% HoH to HK$1.7bn.
　　Trends to watch
Sales prices of products surged in 2021. The average benchmark　prices of the firm’s clean coking coal rose 78% YoY in 2021 and 134% YoY in 2H21. The prices of Liulin No.4 coking coal averaged Rmb2,395 in 2021 (+74% YoY) and Rmb3,081 in 2H21 (+128% YoY or +84% HoH), while those of Liulin No.9 coking coal averaged Rmb1,975 (+80% YoY) and Rmb2,595 in 2H21 (+140% YoY in 2021 and 96% in 2H21). Strict control over cost and expenses. The firm’s production cost of coking coal was Rmb325/t in 1H21, and the firm planned to keep full-year cost below　Rmb320/t. Renminbi appreciation against Hong Kong dollar (HKD)　boosting HKD-denominated profit. The firm’s coal sales are mainly denominated in renminbi, and the renminbi appreciated by 6.7% against the HK dollar on average in 2021.
　　Watch operation of downstream sectors and supply disruption from　import obstacles in 2022. As of January 25, the average prices of Liulin No.4 and No.9 coking coal had rebounded 16.3% and 17.0% compared with end-2021 driven by restocking at downstream steelmakers. Amid China’s efforts in 2021 to increase coal output to ensure supply, the approved production capacity of coking coal increased and we think this will mitigate supply shortage of coking coal. However, import obstacles may continue weighing on supply, in our view. China’s import volume of coking coal fell 3.3% MoM to 7.49mnt in December 2021 (import from Mongolia down 39.1% MoM) due to COVID-19 outbreaks. While coal import from Australia has gradually increased, we suggest continue watching potential disruption to coking coal supply considering COVID- 19’s impact on coal import from Mongolia. Meanwhile, we suggest watching for a boost to downstream demand from infrastructure construction. Amid China’s policy efforts to stabilize growth, we think that infrastructure investment will gain traction and the steel sector will　maintain stable operation, creating stable demand for coking coal.
　　Valuation and recommendation
　　Due to a change in our price assumptions, we raise our earnings　forecast 22% to HK$2.46bn for 2021 and 14% to HK$1.95bn for 2022, and introduce a 2023 forecast of HK$1.92bn. The stock is trading at 6.1x 2022e and 6.2x 2023e P/E. We maintain OUTPERFORM. Based on our new earnings forecasts, we raise our TP 8.3% to HK$3.25 (8.4x　2022e and 8.6x 2023e P/E with 37% upside).
　　Risks
　　Accelerating economic slowdown, unexpected increase in coking coal supply, unexpected decline in the prices of coking coal.