China Shenhua (601088): Cash Cow Advantage Highlights Upgrade to Outperform Industry

China Shenhua (601088): Cash Cow Advantage Highlights Upgrade to Outperform Industry

Opinion Focus Upgrade to Outperform Industry Investment Suggestion We raise China Shenhua-A / -H rating to outperform industry.

The reasons are as follows: Thermal coal prices are expected to rise in the fourth 武汉夜网论坛 quarter.

In the context of the continued improvement of mine safety and environmental protection and the gradual recovery of domestic coal demand, we believe that thermal coal prices are expected to rise in the winter season in the fourth quarter.

South African coal imports were at 2 last year.

The high level of 800 million tons is still up 8% year-on-year in the first eight months of this year. We think that the margins tend to fall, which is good for coal prices.

Initially, our judgment on the price prospects of thermal coal is also more optimistic than the market, mainly because coal is still the mainstay of energy in developing countries, and low prices are not conducive to the industry’s deleveraging and reinvestment.

  The integration of upstream and downstream business has obvious competitive advantages.

Shenhua has high-quality assets, low coal production costs, and integration of upstream and downstream. The ratio of long-term coal sales is close to 90%. Even if the price of coal changes, it will also help maintain a relatively stable profitability.

  The advantages of cash cows continue to emerge.

At the end of the second quarter of this year, the company’s net cash reached 811 trillion, accounting for 20% of its net assets.

Under the assumption that the annual average price of the port is 550-580 yuan / ton, we believe that the company’s free cash flow is still expected to reach 60.62 billion US dollars, which is equivalent to the current A / H market value of 16% / 21%.

If a 40% dividend payout ratio is assumed, the company’s net cash may exceed 2,000 trillion in three years, which is equivalent to 51% / 68% of the current A / H stock market value.

With such a large amount of accumulated cash, the company’s ROE is under pressure to reduce the efficiency of capital operations. Without large capital expenditures, increasing dividends is one of the effective measures to improve the efficiency of capital operations.

  What makes us different from the market?

The current company A / H shares correspond to 4.

1x / 3.

2x 2020eEV / EBITDA, Shenhua H shares are only 0.

8x 2020e P / B.

We believe that current estimates re-reflect the true asset value of Shenhua.

Even in the green range of coal prices, Shenhua’s earnings and cash flow are still strong, and the background of the decline in global interest rates highlights Shenhua’s long-term investment value.

  Potential catalyst: Coal prices may exceed expectations in the fourth quarter, and dividends have room for improvement.

  Earnings forecasts and estimates Maintain 2019/20 A-share earnings forecasts2.

30/2.

32 yuan, H 杭州龙凤网 shares 2.

32/2.

37 yuan.

  We believe that the company’s stable profit and cash flow in the current market environment have a special configuration value. We raise the A / H rating to outperform the industry, and raise the target price of A / H shares by 40% / 32% to 28 yuan / 25 HKD.Target price corresponds to 5.

7x 2020e EV / EBITDA and 42% growth space, H-share target price corresponds to 4.

7x 2020e EV / EBITDA and 50% growth space.

  Risky coal prices fell more than expected; dividends fell short of market expectations.