Weak coal prices drag China Resources Power's business

Coal mining business is observably troubled.

In 1H14, given the persistent weak coal price, China Resources Power recognized a HKD2bn impairment loss on its coal mine assets (mainly on CR Liansheng) after consulting an independent valuation expert. According to a research note from Nomura, while the company stated that appreciation of some coal mine assets was not recorded in financial statements pursuant to accounting standards, the report noted that the impairment is fair given that the coal price is unlikely to recover in the near future amid the severe domestic oversupply situation.

In addition, with the sharp ASP decline to CNY336/ton vs. a cash cost of CNY220/ton in Shanxi or CNY300+/ton in Hunan, the coal mining segment struggled to achieve breakeven in 1H14 (after stripping out the impairment loss of HKD1,999mn).

Here’s more from Nomura:

As such, the company restricted coal production in 1H14 to 6.2mn ton (down 17% from 7.4mn ton in 1H13) and also revised down its 2014F sales target to 14mn ton (vs. previous guidance of 16mn ton).

Overall, we maintain our bearish view on future coal price trends, given:

(1) the oversupply situation will not ease in the near term amid softening domestic economic growth; and

(2) the potential on-grid tariff cut will result in IPPs passing through the pricing pressure to upstream coal suppliers.

As such, while CR Power will benefit from the unit fuel cost drop, its coal mining business will continue to remain a drag on the company’s overall performance and we may see further impairments if coal prices continue to decline.