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Eric Ng

Firm sells more coal but lower sale prices affect margins

China Shenhua Energy, the world's second-largest coal producer by sales volume, posted an 11.8 per cent rise in net profit to a record 17.46 billion yuan for last year, although it was below market expectation due to lower than expected coal sale prices.

The profit is 7.2 per cent lower than the 18.83 billion yuan mean forecast of 21 analysts polled by Thomson First Call and 5.4 per cent below the 18.45 billion yuan forecast of  the same number of analysts in a Bloomberg survey.

Second-half net profit grew 13 per cent year on year to 8.85 billion yuan,  outpacing a 10.4 per cent increase in the first half.

The firm will pay a 34 fen per share final dividend,  up from 12.5 fen in 2005.

China Shenhua, which has an integrated coal and power production network  as well as  a rail and ship coal transport operation, last year sold 171.1 million tonnes of coal, 18.5 per cent more than in 2005.

Of that, 135.7 million tonnes were produced by the company, an increase of 10.4 per cent  from the previous year.

Sales of coal sourced from third parties that it  blended with its own coal to enhance quality and to fill its rapidly rising transport capacity soared 64 per cent to 35.4 million tonnes. Power sales surged 42.2 per cent to 51.71 billion kilowatt-hours.

Analysts said a 59.8 per cent jump in the cost of coal bought from third parties was responsible for a fall in its coal division's operating profit margin to 42.9 per cent from 46.8 per cent in 2005.

'Higher purchase prices of coal from external sources have dragged down China Shenhua's profit margin,' said UOB Kay Hian analyst Foo Choy Peng. Third-party purchases were 48.5 per cent more expensive than self-produced coal on average.

The average coal selling price edged up 0.88 per cent to 308.10 yuan per tonne,  slightly below a 2 per cent rise to 310 yuan forecast by BOC International.

The average domestic selling price rose 4 per cent  due to tight supply  as  the government increased  efforts to close unsafe mines, while the average export price tumbled 7.8 per cent to 381.60 yuan per tonne.

Analysts expect coal prices to remain firm this year as the government continues its efforts to shut  small and unsafe mines, while demand should remain strong  as the economy heads for 10 per cent  growth.

Overall, the industry's annual  output growth has fallen between  8 per cent and 10 per cent in the past 2 years from between 15 per cent and 22 per cent  over 2001 to 2004.

'We expect this trend to continue given the stricter enforcement of mine safety regulations by the Chinese authorities,' said ABN Amro in a research report.  'We expect domestic coal demand  and supply to be fairly balanced, [which] should provide strong support for domestic coal prices.'

China Shenhua's management said in January the company had signed 1-year sales at prices at least  5 per cent higher than last year's. Contract sales accounted for 77.3 per cent of domestic sales in 2005.

ABN Amro forecast that the company's output would grow 14.2 per cent this year to 156 million tonnes. It said production would  log  a compound annual growth rate of 12 per cent from 2005, to 215 million tonnes in 2010.

Of the 2010 volume, the European brokerage  expects 15 million tonnes  to come from asset injections from the firm's parent Shenhua Group.

China Shenhua chairman Chen Biting said the injection of coal and power assets was possible this year.



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