China Shenhua Energy reveals it expects a crazy 50% profit drop in 2015

Will recovery save the firm in 2016?

According to Barclays, China Shenhua Energy's coal business did well in the quarter, while weakness in power and railway were the key drivers for the bigger miss. Free cash flows were better than expected but net debt increased sequentially. 

Shenhua expects its full year net income to decline 50% or more y/y in 2015. "While a >50% decline would imply a loss in 4Q, we would flag that Shenhua has usually been conservative in its near-term guidance. Nevertheless, 4Q is unlikely to show any meaningful sequential recovery and any upside for the power business remains to be seen," Barclays said.

Here's more from Barclays:

Shenhua announced the acquisition of 3.12GW thermal power capacity from its parent company, for a consideration of RMB5.4bn. The acquisition will add 11% to Shenhua’s attributable capacity.

While we do not see the cash payment to be an issue (and hence the deal could be EPS accretive), the average operating margin for the plants was 16.9% for 9M’15, lower than the 34% Shenhua earned in its power business in 1H’15; hence the acquisition could be viewed in the market as asset quality dilutive for its power business.