China Shenhua Energy Co warns of 50% crash in 1H15 bottom line

And it's likely to dive lower amidst powet tariff cuts.

China Shenhua Energy Co., Ltd.'s EPS for 1Q at RMB0.34 was 3% lower than Barclays' estimates and declined 19% q/q.

According to a research note from Barclays, although the operating profit was 11% lower than its estimates, the lower than expected tax rate offset the impact on the bottom line.

Amid weaker activity across its businesses, the key positive in the release was cost optimisation in the coal business, which is running ahead of Barclays' estimates.

Shenhua has warned of a 50% y/y decline in the bottom line in 1H15, which implies an even larger decline in 2Q than Barclays estimates. The tariff cut in power, sharp decline in coal prices and continued weakness in railway activity appear to be likely drivers for decline in 2Q, in Barclays' view.

However, Barclays notes that higher volumes from commissioning of power plants towards 2H15 and continued cost optimization in coal could help Shenhua to see better profitability in 2H than 1H, but a painful 2Q is undoubtedly ahead, in Barclays' view.

Here's more from Barclays:

Weaker activity in 1Q leads to large sequential decline: 6% q/q decline in coal production, 11% q/q decline in power dispatches and 23% q/q decline in railway volumes were the key drags on Shenhua's operating performance in 1Q15.

The top line was impacted disproportionately by 34% q/q decline in coal sales, which includes low margin third party sales. ASPs however were broadly in line for both coal and power business compared to our estimates.

Cost optimization is ahead of expectations: COGS for self coal has declined 8% y/y following the 6% y/y cut in 2H14 and was ahead of our estimates. Similarly, COGS in the power business has declined 6% y/y and was in line with our estimates.

We note that cost reduction by Shenhua (the largest and lowest cost coal miner in China) is unlikely to be positive for coal prices as it pushes the industry cost curve further down. However, the 34% q/q decline in coal sales (of which bulk of the decline is for third party coal sales) will likely squeeze the stranded coal producers, thus helping the supply demand eventually to balance.

Headwinds all around in 2Q: Coal prices have declined by another RMB60-70/t in 2Q and a power tariff cut in China has been announced. Shenhua expects a pre-tax impact of RMB2.65 billion from the tariff cut, and 2Q15 will be the first full quarter of this impact on earnings.

Railway volumes remain a key swing factor, where potential for recovery depends upon the successful ramp up of newly commissioned lines, although we do not factor this into our estimates.