Strong FY13 net profit beating UBSe and consensus

China Shenhua reported FY13 net profit of Rmb45.1bn (EPS Rmb2.27), down 8%YoY,10% above UBSe of Rmb40.8bn (EPS Rmb2.05), and 3% above consensus ofRmb43.6bn (EPS Rmb2.24). The beat is due to better-than-expected ASP. Coal outputwas up 5%YoY to 318mt, in-line with UBSe but coal sales was 515mt, 11% higherthan UBse with more third party coal sales. Power output was up 9%YoY to 210bnKwh, in-line with UBSe but 2% higher than guidance of 205bn Kwh. Shenhua declareddividend of Rmb0.91/share, meaning a 40% payout.

ASP strong beat, cost control in-line

Shenhua's 2013 ASP only declined 8%YoY to Rmb372/t, versus a 17%YoY decline inthe QHD benchmark price and our forecast 9.5% decline. We believe the beat is due toimproving mix sales by raising seaborne sale to 54% of total sales volume, versus 50%in 2012. We stress the better sales mix supports our view that China Shenhua cansuccessfully increase its seaborne market share to further increase pricing power. Costcontrol remains effective, with mine unit cost up 5%YoY to Rmb136.5/t, in-line withour estimate of Rmb137/t and versus an average cost increase of 7%YoY 2009-2012.

2014 flat output guidance, effective capex adjustment

Shenhua guided flat coal output for 2014 at 318mt, and power at 210bn Kwh. 2014sales target is also flat YoY at 515mt. Shenhua spent Rmb48bn of capex in 2013, 22%lower than guidance of Rmb67bn mainly with lower capex in coal mining. Thecompany guided 2014 capex of Rmb50bn. 2013 net gearing was 18.8%, versus UBSeof 18.1%. With cash balance of Rmb38bn end-2013, and operating cash flow ofRmb69/73bn in 2014/15E, we stress Shenhua should easily finance its capex.

Valuation: TP of HK$27.40, maintain Buy

Our TP is based on 2014E target PE of 10.7x, which was the weighted average targetPE of Daqin Rail, Huaneng Power and applying 31% premium to Yanzhou Coal's targetPE of 7.9x to reflect a more diversified business model. Our TP represents 5% discountto our NPV of HK$28.79/share.

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