Metals &Mining-Coal First Take:Coal 1H results disappointing,but not out of woods yet

Shenhua and China Coal 1H15: the weakness continued.

    Shenhua: 1H15 revenue/net income declined 32%/43% yoy, in line with itspre-announcement. Its power segment surpassed coal, becoming thebiggest operating profit contributor in 1H15 (42%, vs. 32% for coal and 28%in 1H14). Other segments (coal, transportation) suffered from significantyoy declines in volume and margin.

    Due to weak demand for coal and thermal power, Shenhua warned that its1-3Q net income might drop up to or more than 50% yoy – which implies a3Q15 net income of Rmb2.6bn, 30% lower than 4Q08 level, despite sharpcapacity growth in all segments since then. The company’s FY15 operatingtarget and capex plan remains unchanged for now.

    China Coal: The Rmb 1.1bn loss in 1H15 is in line with the profit warningand makes 2Q15 the fourth consecutive loss-making quarter. Its coalchemicals projects launched since 2H14 contributed c.20% of its 1H15revenue and helped to offset the loss in its coal segment. 1H15 financingcost more than doubled yoy, and EBIT interest coverage dropped to 0.3x in1H15, vs. 2.6x in 1H14. China Coal’s coal segment accounts for 46% of thecompany’s 1H15 capex spending.

    Coal price: not bottoming yet.

    Ytd coal price is down by 26%, reaching the lowest level since 2004,suggesting over 80% of China coal miners are currently suffering losses.

    However, we expect coal prices to remain weaker for longer due to 1)persistently high production: despite 26% coal prices decline ytd, Jan-Julcoal production only declined 7.2%; 2) weak power demand with stronghydro power supply: Jan-Jul power generation was only up 0.4% yoy, butof which coal-fired power generation was down 3% yoy while hydro powergeneration was up 9.6% yoy.

    QTD coal prices declined a further 3% from the end of 1H15. This, coupledwith weak coal volume (Shenhua and China Coal saw their respective Julycoal production volume declined 10%/13% yoy), leads us to expect that 3Qwill be another tough quarter.

    We put our earnings estimates and target prices for both Shenhua andChina Coal under review, pending more details from analyst briefings onAugust 24, 2015.