FIRST SHANGHAI: Maintains "buy" rating on China Shenhua Energy (01088) with a target price of 40.45 Hong Kong dollars.

FIRST SHANGHAI released a research report stating that it maintains a "buy" rating for China Shenhua Energy (01088). Taking into account the current coal and electricity prices, the company's net profit forecast for 2024-2026 is adjusted to 60.9/61.4/61.9 billion yuan, with a target price of HK$40.45. Looking ahead, the company's integrated operation advantages in the industry will continue to be reflected, with stable profit levels from high-long-term coal sales structure, challenges in the electricity and transportation business to cope with cyclical fluctuations, and the gradual fading of the impact of declining coal prices in the second half of the year. The inclusion of state-owned enterprise market value management in evaluations is expected to boost the company's valuation. FIRST SHANGHAI's main points are as follows: First-half performance meets expectations: In the first half of 2024, the company achieved revenue of 168.1 billion yuan, a year-on-year decrease of 0.8%; net profit attributable to shareholders reached 32.8 billion yuan, a year-on-year decrease of 11.1%. Operating net cash flow increased by 52.7 billion yuan, a year-on-year increase of 13.6%; in the second quarter, revenue reached 80.4 billion yuan, a year-on-year decrease of 2.4%, while net profit attributable to shareholders reached 15 billion yuan, a year-on-year decrease of 7.2%. Profit stability demonstrated under coal price pressure in the first half: The company achieved a coal production of 163 million tons in the first half, a year-on-year increase of 1.6%, with sales reaching 230 million tons, a year-on-year increase of 5.4%. Revenue from the coal business was 134.3 billion yuan, a year-on-year decrease of 0.7%. Due to the decline in coal prices, the pre-tax profit of the coal sector in the first half of the year decreased by 17.2%. As a result of rising labor costs in the first half of the year, the company's unit production cost for self-produced coal was 172 yuan/ton, a year-on-year increase of 3.2%. In terms of coal sales structure, long-term contracts accounted for 86% in the first half of the year, which was similar to the same period last year. The average annual long-term contract sales price in the first half of the year decreased by only 2% year-on-year, with price fluctuations much smaller than the market spot price, allowing the company to maintain stable profits under coal price pressure in the first half of the year. In terms of new capacity, the New Street One and Two projects are actively advancing and are expected to start releasing capacity gradually in 2028. The Three and Four projects have been granted exploration rights and are making efforts to carry out preliminary work. When all four mines are expected to be in full production, they will contribute an annual capacity of 30 million tons. Integrated operation layout to cope with cyclical fluctuations: In the first half of the year, the company's power generation sector achieved a revenue of 44.4 billion yuan, a year-on-year increase of 0.4%; pre-tax profits decreased by 8.9% year-on-year. Due to the impact of the recovery of hydropower in the first half of the year, the company's operating hours for thermal power decreased by 6.2%, coupled with a 3.3% year-on-year decrease in the selling price of electricity in the first half of the year, resulting in a 0.7 percentage point decrease in the company's power generation business gross profit margin. The company's coal-electricity integration operating model greatly alleviates profit pressure during coal price fluctuations. This year, the company is expected to put into operation new 2-gigawatt coal-fired generating units in the second half of the year. After August, the crowding-out effect of hydropower on thermal power gradually diminishes, with the electricity sales volume growth rate reaching 15.8% in August. The impact on operating hours for the whole year is expected to narrow. The company's integration model of coal + transportation + electricity operation greatly smooths out the impact of the cycle on profits. With the continuous commissioning of new installed capacity, the company's electricity sales business is expected to maintain a stable profit size in the long term. Risk factors: sharp decline in long-term coal prices, and lower than expected capacity of new power generation units.