Shenhuo Coal and Power's 1Q26 earnings preannouncement beat expectations, with a significant increase in profit contribution from the aluminum business

Overview

This report is Morgan Stanley's commentary on Shenhuo Coal and Power's 1Q26 earnings preannouncement. The company expects 1Q26 net profit to rise to RMB 2.3 billion, up 217% YoY and 336% QoQ, above Morgan Stanley's earlier estimate of RMB 2.1 billion. The upside surprise mainly comes from higher profits in the aluminum segment: aluminum prices rose 17% YoY and 11% QoQ, while abundant global supply drove alumina prices down 31% YoY, reducing raw material costs.

Core views

The core view is that Shenhuo Coal and Power's earnings momentum in 2026 still has room to continue. Overseas aluminum supply disruptions have supported aluminum prices; since the start of the year, about 3.13 million tons of capacity abroad have been shut in, equivalent to roughly 4% of the global supply reduction, helping aluminum prices stay near the upper end of the range. Although bauxite prices have rebounded due to higher freight rates and potential export restrictions in Guinea, the report still believes alumina supply is ample and prices may fluctuate around production costs. Lower production costs and a better aluminum price outlook together support the company's earnings growth in 2026.

Analysis framework

The report combines a comparison between the earnings preannouncement and sell-side estimates, a breakdown of commodity price and cost drivers, tracking of overseas supply disruptions, and valuation model exposition to judge Shenhuo Coal and Power's near-term earnings beat and full-year profit momentum.

Methodology notes

• Valuation methodsResidual income model

  Residual income model

  Report uses the residual income model for valuation, with a cost of equity of 7.9% derived from a beta of 0.76, a risk-free rate of 1.8%, and an equity risk premium of 8%, and assumes a steady-state revenue growth rate of 2% and a long-term ROE of 15.0%.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Shenhuo Coal and Power (000933.SZ)

  Research target

  Strengths

  1Q26 earnings beat expectations; higher aluminum prices and lower alumina costs jointly improved profit; overseas supply disruptions supported aluminum prices.

  Weaknesses

  Earnings are sensitive to aluminum prices, coal and energy costs, and the global demand cycle; the report body does not provide a full rating, target price, or valuation upside.

  Comparison

  Compared with Morgan Stanley's estimate, the expected 1Q26 net profit of RMB 2.3 billion is above its RMB 2.1 billion forecast.

  Risks

  A slowdown in global demand, rising raw material and energy prices, and industry overcapacity.

Key data

• Expected 1Q26 net profitRMB 2.3 billionUp 217% YoY and 336% QoQ, above Morgan Stanley's RMB 2.1 billion estimate.
• Change in aluminum prices+17% YoY, +11% QoQThe rise in aluminum prices was an important reason for the increase in profit contribution from the aluminum segment.
• Change in alumina prices-31% YoYAmple global supply drove raw material costs lower.
• Overseas idled aluminum capacity3.13 million tonsIncluding 580,000 tons in Mozambique and 2.55 million tons in the Middle East; the report says this supports about a 4% reduction in global supply.
• Cost of equity assumption7.9%Based on a beta of 0.76, a risk-free rate of 1.8%, and an equity risk premium of 8%.
• Long-term ROE assumption15.0%Used in the residual income model.

Impact & implications

The report is positive on Shenhuo Coal and Power's near-term performance and 2026 earnings trend. If aluminum prices continue to be supported by overseas supply disruptions while costs such as alumina remain low, the company's profit leverage may continue to be released; however, the investment view still needs to be combined with the demand cycle, energy and raw material prices, industry capacity changes, and the latest rating and target price not disclosed in the report.

Risks

• A slowdown in global demand.
• Rising raw material and energy prices.
• Industry overcapacity.
• If aluminum prices pull back, profit contribution from the aluminum segment could weaken.
• Morgan Stanley discloses that it may have business relationships with the covered company, and investors should treat this research as only one factor in their investment decision.

What to watch

• Whether net profit in subsequent 2026 quarters continues to improve YoY and QoQ.
• Whether overseas aluminum capacity shutdowns continue, and the impact of Middle East conflicts and electricity price issues in Mozambique on supply.
• The impact of potential export restrictions in Guinea and freight changes on bauxite prices.
• Whether alumina prices continue to fluctuate around production costs.
• Progress in the company's aluminum and coal capacity expansion and electricity cost savings.