2022 results in line with market expectations
　　Shougang Fushan Resources announced its 2022 results: Revenue rose 16% YoY to HK$8.22bn. Net profit attributable to shareholders rose 7.0% YoY to HK$2.72bn, implying EPS of HK$0.54. In 2H22, the firm's revenue was HK$3.55bn, and attributable net profit was HK$1.11bn (-41% YoY, -31% HoH). The firm's results were in line with market expectations. We attribute the earnings growth in 2022 to high coking coal prices. We believe the firm's earnings decline in 2H22 was due to falling coking coal prices and lower coal output and sales volume.
　　Comments:
　　ASP of coking coal rose in 2022. The ASP of clean coking coal rose 19% YoY to Rmb2,402/t (VAT included) in 2022, and that of Liulin No.4 and No.9 coking coal grew 13% and 24% YoY to Rmb2,714 and Rmb2,415/t. In 2H22, the ASP of clean coking coal fell 11% YoY and 2.8% HoH.
　　Output and sales volume of clean coking coal increased slightly. In 2022, output of raw coking coal rose 1.5% YoY to 5.25mnt, and that of clean coking coal edged up 0.9% YoY to 3.23mnt. The firm had 100% of its raw coal washed, and the output ratio of clean coking coal dropped 0.4ppt YoY to 61.5%.
　　Sales of No. 4 and No. 9 coking coal accounted for 27% and 73% of total sales in 2022, and the firm expects the proportions to remain relatively stable in 2023.
　　Unit cost increased. In 2022, the unit cost of raw coking coal rose Rmb25/t YoY to Rmb404/t. Excluding the impact of depreciation & amortization and uncontrollable costs (e.g. resource tax), the unit cost of raw coking coal grew Rmb7/t YoY to Rmb227/t, as labor, raw material costs and building maintenance expenses increased.
　　Selling and distribution expenses climbed 29% YoY to HK$349mn, and selling expense ratio edged up 0.4ppt YoY to 4.2% in 2022, due to higher sales volume of clean coking coal, and increased logistics costs as a result of a higher proportion of shipments by train and sea.
　　As of end-2022, the firm had about HK$7.24bn of free cash resources. It has HK$6.01bn of free bank balances and HK$1.22bn of free bills receivable.
　　Dividend yield to remain high. The firm plans to pay a final dividend of HK$0.28/sh for 2022 (interim dividend at HK$0.15/sh). Its full-year dividend payout ratio may stay at around 80% in 2022, implying a dividend yield of 17.6% at the current share price.
　　Trends to watch
　　Coking coal prices to remain high, supporting earnings and dividend payout. Although coking coal imports are gradually improving, we expect coking coal prices to remain relatively high, as the domestic supply remains limited, infrastructure construction in China is likely to boost demand in 2023, and the real estate sector may bottom out and recover slowly. Thus, we expect the firm's earnings growth to remain resilient. Meanwhile, we are upbeat that the firm’s dividend payout may remain attractive, given its relatively stable capex in the short and medium term.
　　Financials and valuation
　　Given the YoY decline in coking coal prices, we lower our 2023 earnings forecast 6% to HK$2.30bn. We introduce our 2024 earnings forecast at HK$2.20bn. The stock is trading at 5.4x 2023e and 5.6x 2024e P/E. Maintain OUTPERFORM. Considering a possible decline in the firm’s earnings and rising risk of overseas economic recession, we cut our target price 10% to HK$3.15, implying 6.9x 2023e and 7.2x 2024e P/E with 29% upside.
　　Risks
　　Recovery of downstream demand disappoints; supply exceeds our expectations.