1H22 results in line with our expectations
Shougang Fushan Resources announced 1H22 results: Revenue rose 90.8% YoY to HK$4.66bn, and attributable net profit grew 138.6% YoY to HK$1.61bn (HK$0.32/sh), in line with our expectations. We attribute its net profit growth to increased sales volume and higher coking coal prices. The firm paid an interim dividend of HK$0.15/sh, implying a dividend payout ratio of 47%.
　　Outputs of raw and clean coking coal increase, as does output ratio of clean coking coal. In 1H22, output of raw and clean coking coal rose 3.4% and 20.0% YoY to 2.7mnt and 1.74mnt. The output of raw coking coal in 1H22 accounted for 51% of the firm’s full-year target, and the firm had 100% of its raw coal washed. The output ratio of clean coking coal increased 8.9ppt YoY to 64.4%. Sales volume of clean coking coal grew 6.7% YoY to 1.74mnt. Specifically, sales volume of self-produced clean coking coal increased 16.0% YoY in 1H22.
　　Coal prices increasing. In 1H22, ASP of clean coking coal increased 78% (or Rmb1,106/t YoY) to Rmb2,521/t (VAT included). Liulin No.4 and No.9 coking coal prices grew 76% and 107% YoY in 1H22. ASP growth of the firm’s clean coking coal was largely in line with the market trend in 1H22. The portion of high-ASP No.1 clean coking coal in the firm’s total clean coking coal sales volume dropped 4ppt YoY to 27%.
　　Unit cost increasing. In 1H22, the unit cost of raw coking coal grew 29% (or Rmb93 YoY) to Rmb418/t. Cash cost grew Rmb93/t YoY to Rmb344/t, as uncontrollable costs (e.g. resource tax) came to Rmb127/t (up Rmb63/t YoY). Excluding resource tax, the cash cost increased Rmb30/t YoY to Rmb217/t.
　　One-off additional amortization of relocation and reconstruction costs for village located in Xingwu Coal Mine amounted to Rmb168mn in 1H22.
　　Other income and yields dropped HK$86.86mn YoY to HK$2.94mn in 1H22, due to a YoY decline of HK$145mn in forex gains.
　　Net operating cash inflow increased HK$830mn YoY to HK$1.88bn in 1H22.
　　Trends to watch
　　Coking coal prices in 2H22 are decided by the progress in demand recovery. Coking coal prices have recently rebounded thanks to restocking demand from downstream coking plants and steelmakers. However, we believe an ongoing recovery in demand depends on the real estate market and construction of physical infrastructure. Over January-July, coking coal imports increased 24% YoY to 32.18mnt. Imports of Mongolian coal continued to rise and imports of Russian coal also increased. In our opinion, coking coal imports this year may be lower than the pre-COVID-19 level, but will likely be higher than the 2021 level. As a result, we think tight coking coal supply will likely ease further in 2022, and we suggest investors watch the recovery in downstream demand.
　　Financials and valuation
　　Given changed coal price assumptions, we raise our 2022 and 2023 EPS forecasts 18% and 10% to HK$0.63 and HK$0.48. The stock is trading at 4.0x 2022e and 5.2x 2023e P/E. We maintain OUTPERFORM and our target price of HK$3.50 on expectations coking coal supply shortages will ease, implying 5.6x 2022e and 7.3x 2023e P/E, offering 40% upside.
　　Risks
　　Recovery of downstream demand disappoints; supply exceeds our expectations.