Shenhua adjusting to offset potential decline in profitability

Amid thermal power tariff cut risks.

China Shenhua Energy Co., Ltd. recently released detailed financials for 2014, for which the headline numbers were released in February.

According to a research note from Barclays, a detailed look at the numbers shows a notable cost reduction in the coal business, better-than-expected pricing and cost dynamics in power, and a y/y increase in profitability in the railway business.

For power, Barclays noted that costs decline offset for tariff risks. Given the ongoing risk of tariff cuts for thermal power in China, Shenhua appears to be positioning itself better to offset for a potential decline in profitability.

Unit COGS for power has declined by 8% y/y in 2014 due to lower coal prices, with the company giving guidance of a 6.6% y/y increase in its power dispatches, which could imply an increase in its utilisation hours.

On a medium- term basis, Shenhua has announced project approvals for over 16GW projects in the past 6-12 months, which Barclays believes will help the business to increase its earnings.

Here's more from Barclays:

Coal – asset quality to the fore in tough times: The unit cost for self produced coal of RMB132/t was 11% lower than our estimates for 2014 and implies a 9% y/y reduction compared with 2013 unit costs before restatement.

4Q14 coal ASP was also ahead of our estimates by RMB5/t. Shenhua has guided for a 10.8% y/y reduction in coal production to 273.6mt in 2015, which we believe is conservative.

Logistics – continues to be a bright spot: The railway business increased its profitability by 6% y/y in 2014, in the context of a 12% y/y decline in group profitability. This was achieved on the back of higher volumes and lower costs.

Going forward, commissioning of the Zunchi line together with other lines under trial operation will help to increase volumes, while the recently announced hike in rail tariffs should help to increase its earnings further in 2015, in our view.