2021 results beat our expectations
　　Shougang Fushan Resources announced 2021 results: Revenue rose 77% YoY to HK$7.08bn, and attributable net profit grew 135% YoY to HK$2.54bn (HK$0.5/sh). In 2H21, revenue came to HK$4.63bn, and attributable net profit increased 251% YoY and 177% HoH to HK$1.87bn.
　　The firm’s results beat our expectations as coking coal prices soared.ASP of coking coal rose. In 2021, the firm’s clean coking coal ASP grew 66% YoY to Rmb2,019/t (VAT included). Liulin No.4 and No.9 coking coal price averaged Rmb2,397/t (up 74% YoY) and Rmb1,980/t (up 80% YoY) in 2021. In 2H21, the ASP of the firm’s clean coking coal grew 119% YoY and 94% HoH.
　　Output and sales volume of clean coking coal largely flat in 2021. The　firm’s raw coking coal output increased 4% YoY to 5.17mn tonnes in 2021.The output of its clean coking coal fell 1% YoY to 3.20mn tonnes, and sales volume grew 1% YoY to 3.30mn tonnes. In 2H21, raw coking coal output fell 5% YoY and 2% HoH to 2.56mn tonnes. In contrast, clean coking coal output grew 1% YoY and 21% HoH to 1.75mn tonnes. In 2021, the firm had 100% of its raw coal washed, and the output ratio of clean coking coal fell 4.4ppt YoY to 61.9% due to a large amount of waste rock in mining areas in 1H21. In 2H21, the output ratio of clean coking coal grew 2.3ppt YoY and 12.8ppt HoH to 68.4%.
　　Per tonne production costs rose. Per tonne production costs of raw coking coal grew Rmb66 YoY to Rmb379/t which, excluding depreciation and amortization, and uncontrollable costs (e.g., resource tax), came to Rmb220/t (up Rmb31 YoY). We attribute the growth to increased expenses on village resettlement, environmental protection, and labor and electricity costs.
　　Selling expenses fell 15% YoY to HK$270mn as the cost of long-distance automobile transportation fell due to less sales to relevant clients.
　　Other operating expenses grew 49% YoY to HK$96mn as the RMB/HKD exchange rate rose and the firm booked a HK$23mn loss from the impairment of receivables.
　　At end-2021, the firm had about HK$8.41bn of cash resources, up　HK$3.30bn YoY. The firm HK$6.43bn of free bank balance and cash (excl.　HK$358mn in bank deposits) and HK$1.98bn of free bills receivable.
　　Trends to watch
　　High dividend yield ratio attractive. The firm proposed a final dividend　of HK$0.32/sh (an interim dividend of HK$0.08/sh), implying a full-year dividend payout ratio of around 80% in 2021 and a dividend yield ratio of 13.8% based on its current share price. We expect coking coal prices to remain strong in the near term. As the tight supply-demand condition of coking coal intensifies globally, overseas coking coal prices have remained high. The COVID-19 pandemic continues to disrupt China’s coking coal imports. Given the pressure on imports and tight domestic supply, we expect coking coal prices to remain strong in the short term.
　　Financials and valuation
　　We are upbeat on the coking coal market. We lift our ASP for clean coking coal in 2022 by 31% and for 2023 by 13% (up 9% and down 3% from 2021 ASP) and we raise our earnings forecast for 2022 by 37% to HK$2.69bn and for 2023 by 15% to HK$2.20bn. The stock is trading at 5.5x 2022e and 6.7x 2023e P/E. We maintain OUTPERFORM and lift our TP 7.7% to HK$3.50 (6.6x 2022e and 8.0x 2023e P/E), offering 21% upside.
　　Risks
　　Accelerating economic slowdown; unexpected increase in coking coal supply; unexpected decline in coking coal prices.