CICC issued a research report stating that it has lowered coal price and cost assumptions, reducing SHOUGANG RES's (00639) 2025/26E earnings by 4%/4% to HK$8.92/9.78 billion. The current share price corresponds to 2025/26E P/E ratios of 15.8x/14.4x. Considering changes in risk appetite, the company's dividend attractiveness has strengthened relatively. The firm maintains its outperform rating and target price of HK$3.00, corresponding to 2025/26E P/E ratios of 17.1x/15.6x, implying 8% upside potential.

CICC's main views are as follows:

1H25 Results Better Than Expected The company released its interim results, with 1H25 net profit attributable to shareholders declining 38% year-on-year to HK$4.04 billion, which was better than expectations. The profit decline was mainly affected by falling coal prices, but the decline was smaller than expected, primarily due to the company's cost reduction exceeding expectations.

1) Production Recovery. 1H25 raw coking coal/clean coking coal production increased 17%/19% year-on-year to 2.64/1.54 million tons respectively, with 100% raw coal washing. Clean coking coal sales increased 16% year-on-year to 1.55 million tons. The significant production increase in the first half was mainly due to the phased suspension and working face changes at Xingwu Coal Mine during the same period last year.

2) Coal Price Decline. 1H25 average selling price of clean coking coal decreased 45% year-on-year to RMB1,067/ton (tax-inclusive), while Shanxi prime coking coal at Jingtang Port decreased 36% year-on-year to RMB1,401/ton during the same period, and Shanxi Liulin No.9 coking coal railhead price decreased 39% year-on-year to RMB1,165/ton. The company's coal quality changes led to a larger price decline than the market, mainly because the company began full-scale mining of lower group coal at Xingwu Coal Mine from July 2024, causing coal quality changes and no longer producing higher-priced low-sulfur prime coking coal (Liulin No.4 coking coal). Additionally, since mining the lower group coal, the sulfur content of coal produced by Xingwu Coal Mine has been relatively high, also affecting overall selling prices.

3) Significant Improvement in Unit Production Costs. 1H25 unit production cost of raw coking coal decreased 28% year-on-year to RMB328/ton, with cash costs declining 32% year-on-year to RMB241/ton. After excluding uncontrollable costs such as resource taxes, cash costs decreased 31% year-on-year to RMB185/ton.

4) 1H25 operating cash net inflow decreased by RMB727 million year-on-year to RMB453 million. As of end-June, the company had available free funds of HK$9.475 billion (HK$8.406 billion after excluding 2024 final dividend).

5) 1H25 proposed interim dividend of 6 HK cents, corresponding to a payout ratio of 76% and interim dividend yield of approximately 2.2% based on current share price.

Q3 2025 Coking Coal Price Rebound and Recovery, Cautiously Optimistic About 2H25 Coking Coal Fundamentals Since July, with supply contraction in some regions, coking coal prices have started a rebound recovery trend. Liulin No.9 coking coal prices rose from the June low of RMB968/ton to RMB1,278/ton on August 28. The Q3 2025 average price was RMB1,209/ton, up 10% from Q2 2025. Looking ahead, the firm believes that the upside potential for coking coal prices may depend on whether domestic supply can contract further, mainly because under the backdrop of weak steel demand, declining profits, and "anti-involution", expectations for coking coal demand contraction still exist. Meanwhile, as coal prices recover, coking coal imports, especially Mongolian coal imports, may improve marginally.

Risk Warning: Supply release exceeding expectations; demand declining more than expected.