China Shenhua Energy:Special dividend,but impairment risk

Event

China Shenhua reported 2016 net profit of Rmb24.9bn (EPS of Rmb1.25),up 41% YoY and in line with the positive profit alert published in January.

This is a mixed result, with the company incurring an Rmb2.8bn impairmentloss from a technical upgrade and transformation of the energy conservationand environmental protection of coal-fired generators as well as equipmentupgrades in some coal mines.

On the positive side, China Shenhua proposed, for the first time since 2009,a special dividend of Rmb2.51 per share (Rmb49.9bn), subject to approval atthe AGM. The company also proposed a final dividend of Rmb0.46 (Rmb9bn).

Impact

Sales on track for recovery, 2017 guidance: Sales volume rose 7% YoY,mainly driven by 3% YoY growth of mine coal output (290mt) and a 17% YoYrecovery for third-party coal volume, to 105mt.

Power output better than national, but potentially more impairment:Shenhua’s total power dispatch rose 5% YoY to 221bn Kwh, a 3% beat to our2016 forecast of 215bn Kwh and ahead of the 3% YoY recovery in nationalthermal power output. However, we do not expect the power segment to bea significant profit driver for 2017/18. As highlighted by our Utilities team,the 50GW excess capacity elimination for coal-fired power capacity cannotbalance the market, with 275GW of capacity under construction/in theplanning stage. We note the risk of further impairment of Shenhua’s powersegment.

Costs in line, but ASP recovers less than QHD: Costs for 2016 declined9% YoY to Rmb108.9/t, in line with our forecast of Rmb108.6/t. We forecastmodest cost 4% growth for 2017, reflecting a low cost base in 1H16 andinflation in China (PPI +2.6% YoY for 2017E). While costs are in line, we notethe realized ASP rose only 8% YoY, lagging the QHD benchmark pricerecovery of 14% YoY. This can be explained by the ASP for internal sales tothe power segment, which rose only 6% YoY to Rmb308/t. The smaller-thanbenchmarkrecovery in realized ASP supports our concern that in times ofa coal price recovery, China Shenhua may have to sell coal internally at adiscount to protect profitability of the power segment.