Text/ATFX

Affected by falling coal prices, etc., China's Shenhua (01088) issued a profit warning yesterday. Earnings in the medium term are expected to fall, and the stock price plummeted by more than 6% in response, making it the worst performing blue chip in the intraday market. The coal sector also declined overall. Yankuang Energy (01171) fell 4.5% early; its subsidiary Yancoal Australia (03668) fell 2.2%; China Coal (01898) fell 4.9%; and Shougang Resources (00639) fell 2.8%.

The group said that according to preliminary estimates, it is expected that the mid-term profit as of the end of June will be 31.8 billion to 33.8 billion yuan, a year-on-year decrease of 8.4% to 13.8%. According to Shenhua, the decline in profits was mainly affected by factors such as a decrease in the average sales price of coal and a decrease in the average number of hours used by coal-fired units.

In the first quarter, China Shenhua achieved revenue of 87.647 billion yuan, an increase of 0.7% year on year; net profit of 15.884 billion yuan, a decrease of 14.7% year on year. As of May 2024, China's Shenhua achieved cumulative commercial coal production of 0.1,361 billion tons, an increase of 2.3% year on year; coal sales volume was 0.1905 billion tons, up 5.3% year on year.

Affected by the decline in coal prices, the overall profit of the coal industry declined in the first half of the year. According to data from the National Bureau of Statistics, in the first 5 months of 2024, the total profit of the coal mining and washing industry above the national scale achieved a total profit of 254.5 billion yuan, a year-on-year decrease of 30.43%.

The domestic thermal coal market fluctuated in the first half of 2024, and the country's raw coal production continued to be at a high level in recent years. Wind data shows that in the first half of the year, the average liquidation price of Q5500 thermal coal at Qinhuangdao Port (produced in Shanxi) fell by about 14% from the average price of 1020.79 yuan/ton in the first half of last year.

However, most of the market is optimistic about the profit improvement brought about by the recovery in demand in the second half of the year. Agencies pointed out that during the traditional peak season of steel in September-October, the main coking coal can still be expected to be tight. The effects of subsequent macroeconomic policies are also expected to support coal consumption demand in downstream industries, which will help the coal sector to recover profitability, but there is not much room for expectations based on the increase in coal prices, which will limit the room for the sector to move forward.

Even in the face of headwind factors, China's Shenhua's stock price hit a new high since this year until it was adjusted in late June. It had been falling for three consecutive days before today's sharp drop. With technical bearish pressure, the stock price is expected to continue to fall below HK$34. Even though performance is expected to decline in the first half of the year, it is still stable and strong in terms of performance prospects. Focus on opportunities to buy again after the stock price is adjusted.