1H24 results in line with our expectations
　　Shougang Fushan Resources (Shougang Fushan) announced its 1H24 results: Attributable net profit fell 32.1% YoY to HK$837mn (implying EPS of HK$0.17), in line with our expectations. We attribute the decline in net profit mainly to falling output and rising cost per tonne due to transition of production from the upper coal seam to the lower coal seam at Xingwu Coal Mine, falling recovery rate of clean coal, and falling selling prices of coking coal.
　　Comments: 1) Coal output declined due to the transition of production from upper coal seam to lower coal seam at Xingwu Coal Mine. In 1H24, output of raw and clean coking coal fell 15.4% and 30.6% YoY to 2.25mnt and 1.29mnt. The firm had 100% of its raw coal washed. The clean coking coal washing rate fell 12.6ppt YoY to 57.3%. Sales volume of clean coking coal fell 25.1% YoY to 1.34mnt.
　　2) Selling price of coal declined. In 1H24, the ASP of the firm’s clean coking coal product fell 1.8% YoY or Rmb35/t YoY to Rmb1,938/t (before tax), and the ASP of Liulin #4 and #9 coking coal changed -0.7% and +3.8% YoY over the same period. The sharper decline in ASP of the firm’s coal product was mainly due to changes in product mix, with the proportion of No.1 clean coal in total sales volume falling 21ppt YoY to 3%.
　　3) Unit cost increased due to falling output. In 1H24, the unit production cost of raw coking coal rose 13.3% or Rmb53/t YoY to Rmb453/t, with cash cost rising Rmb31/t to Rmb357/t and cash cost excluding uncontrollable items such as resource tax rising Rmb31/t to Rmb267/t.
　　4) Interest income rose HK$10.84mn YoY to HK$94.59mn in 1H24.
　　5) Net operating cash inflow decreased HK$1.54bn YoY to HK$1.18bn in 1H24. As of 1H24, the firm had bank balances and cash of about HK$9.22bn (excluding the HK$887mn used to pay the 2023 final dividend, the amount would be around HK$8.3bn).
　　6) The firm proposed an interim dividend of HK9 cents for 1H24 (vs. interim dividend of HK10 cents for 1H23), implying a payout ratio of 53% and an interim dividend yield of around 3.5% at the current share price.
　　Trends to watch
　　Upbeat on increase in output and reduction in cost in 2H24. As Xingwu Coal Mine completed the transition of production from the upper coal seam to the lower coal seam in July, we expect the firm's coal output to gradually recover in 2H24 and its cost per tonne to improve.
　　Room for a sharp decline in coal prices might be limited. Due to tepid downstream demand, coking coal prices have been weakening since end- July, and we expect the firm to cut its coal selling prices. However, we see limited room for a sharp reduction in coking coal prices, taking into account the support from the cost side, limited imports of high-quality coking coal, and the firm's long-term sales contracts signed with some downstream clients.
　　Dividend yield remains attractive. Despite falling earnings in 1H24, the firm still announced an interim dividend, and the YoY decline in the amount of dividend was mild, reflecting the firm's resolve and ability to reward shareholders. Based on the assumption of an 80% dividend payout ratio, we estimate that the firm's annual dividend in 2024E implies a dividend yield of around 10.0% at the current share price.
　　Financials and valuation
　　We cut our EPS forecasts by 15% and 10% to HK$0.32 and HK$0.36 in 2024 and 2025 due to lower assumptions on prices and output. The stock is trading at 8.0x 2024e and 7.1x 2025e P/E. Given the scarcity of high- dividend names and high-quality coking coal names, we maintain our OUTPERFORM rating and target price of 9.3x 2024e and 8.3x 2025e P/E, offering 15.8% upside.
　　Risks
　　Disappointing demand recovery; slower-than-expected progress of projects.