1Q09 NI RMB7,936m, down -14% YoY, up 102% QoQ - Strong results at a headline level for Shenhua. Annualized 1Q09 would be 3.5% ahead of our FY09E EPS. QoQ improvement in production up 5.5%, gross margin up 14%pts and net margin up 7.1%pts.
Performance driven by high spot sales mix at 36% (norm. c20%) - Spot sales at 36% compares with 1Q08 at 20% and 4Q08 at 32.6%. Spot "seaborne" (QHD equivalent) volumes were up 48% YoY. Moreover, the price was at a 4.7% premium to the contract priced seaborne coal for 1Q09
Contract settlement could reverse this trend, lowering ASP by -4.2% - With contract settlement imminent volumes could shift back from spot to contract. Our analysis shows that if we place 1Q09 volumes on 1Q08 product mix, then ASP would fall by -26% for spot sales. This is because the higher ASP products are de-emphasized. Aggregating, domestic sales ASP drops -4.2%, equivalent to lowering earnings by 5.3%.
1Q09 achieved contract prices look shy of market expectations - On average, contract prices look to be up 3.9% YoY, with the benchmark seaborne coal contracts up 7.5%. Even if the top IPP customers sign up 10% then an average 10% increase is unlikely to be achieved. We currently assume a 5% total contract price increase.
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