Improved coal chemical profits drive growth in China Coal Energy's recurring earnings in 1H26, while coal price support is expected to sustain earnings resilience in 3Q26

Overview

The report evaluates China Coal Energy's 1H26 and implied 2Q26 results. Its core conclusion is that the core coal business remained stable despite production constraints, while improvements in coal chemical sales volume, pricing, and margins became a more pronounced source of incremental earnings. Results were in line with market expectations, with the investment thesis and direction of consensus EPS estimates for the next 12 months both broadly unchanged. Morgan Stanley believes supply constraints and peak-season demand can support earnings resilience in 3Q26.

Core views

China Coal Energy recorded net profit of RMB8.1 billion in 1H26, up 6% YoY. Excluding one-off items, recurring earnings were RMB8.5 billion, up 12% YoY, indicating that core earnings grew faster than reported profit. Based on the half-year figures, 2Q26 net profit was RMB4.3 billion, up 15% YoY and 12% QoQ, in line with market expectations. Overall quarterly gross margin rose from 25% in 2Q25 to 28% in 2Q26. The report assesses the impact of the results on the existing investment thesis as "unchanged" and considers the direction of consensus EPS estimates for the next 12 months to be "broadly unchanged." The key tension in the coal segment is the offset between lower sales and production volumes and higher selling prices. Coal segment revenue declined 26% YoY in 1H26, mainly because of reduced traded coal sales and temporary production suspensions caused by tighter safety inspections, which led to an 8% YoY decline in self-produced coal output. However, the company's average coal selling price increased 11% YoY, exceeding the 3% YoY increase in the Qinhuangdao 5,500 kcal coal price. The report attributes this difference to higher product calorific value. Unit cost of sales increased 9% YoY to RMB286/tonne due to higher employee costs and increased depreciation and amortization allocation resulting from lower production. Despite production and cost pressures, pricing performance still enabled coal gross margin to edge up from 44% in 1H25 to 45% in 1H26. The report therefore characterizes the coal segment's performance as stable. Coal chemicals were the main source of profit improvement during the period. Driven jointly by higher chemical product sales volumes and an increase in average selling prices amid the Middle East conflict, coal chemical revenue grew 11% YoY to RMB10.4 billion in 1H26. Segment gross profit surged 62% YoY, while gross margin expanded from 15% in 1H25 to 22% in 1H26. This means coal chemicals contributed not only revenue growth but also a significant margin improvement that enhanced their contribution to group earnings and cushioned the impact of lower coal production. The balance sheet continued to provide support. The company maintained RMB18.0 billion in net cash at period-end, while financing costs declined 14% YoY due to lower borrowing rates. The board declared an interim dividend of RMB0.184 per share, corresponding to a 30% payout ratio. The net cash position, lower financing costs, and cash dividend together underpin the financial resilience highlighted in the report, although the report did not make a new rating adjustment on this basis. For 3Q26, Morgan Stanley expects earnings to remain resilient. For thermal coal, peak summer power demand is driving high daily coal consumption at power plants, while continued safety inspections in major coal-producing provinces are constraining domestic supply, supporting coal prices from both the demand and supply sides. For coking coal, mine suspensions in Shanxi have had a substantial impact on supply, keeping coking coal prices strong as well. The report believes favorable thermal and coking coal prices will flow through to China Coal Energy's 3Q26 earnings. However, this resilience could weaken if sluggish downstream demand causes coal prices to continue falling, mandatory mine suspensions further reduce production and sales volumes, or lower oil prices lead to deterioration in coal chemical margins. The forecast table shows Morgan Stanley's consistently calculated EPS estimates for 2025 through 2028 at RMB1.35, RMB1.51, RMB1.35, and RMB1.27, respectively, while Refinitiv consensus EPS estimates are RMB1.19, RMB1.41, RMB1.37, and RMB1.38. Revenue forecasts for the same period are RMB148.1 billion, RMB159.7 billion, RMB159.3 billion, and RMB159.3 billion, respectively; EBITDA forecasts are RMB39.2 billion, RMB43.6 billion, RMB41.4 billion, and RMB40.6 billion; and ModelWare net profit forecasts are RMB17.9 billion, RMB20.0 billion, RMB17.9 billion, and RMB16.8 billion. These forecasts imply strong earnings in 2026 followed by a decline: ROE falls from 12.5% in 2026 to 10.3% in 2027 and 9.0% in 2028, while the forecast dividend yield declines from 9.5% in 2025 to 4.5% in 2026, 4.0% in 2027, and 3.8% in 2028. On valuation, the report assigns an Overweight rating to China Coal Energy's H-shares, with a Cautious industry view and an HK$13.60 price target, implying 22% upside from the HK$11.19 closing price on August 21, 2026. The price target is derived using a residual income model, with key assumptions including a 7.9% cost of equity, a beta of 0.66, a 2.3% risk-free rate, an 8.5% equity risk premium, an 8.1% WACC, an 8.0% ROE, and a 2% perpetual growth rate. Forecast P/E ratios are 6.6x for 2025, 6.4x for 2026, 7.1x for 2027, and 7.6x for 2028; EV/EBITDA ratios are 4.0x, 4.0x, 4.1x, and 4.1x, respectively; and P/B ratios are 0.7x, 0.7x, 0.7x, and 0.6x.

Analysis framework

The report first adjusts 1H26 reported net profit to recurring earnings excluding one-off items, then derives 2Q26 performance from the half-year figures and compares it with market expectations. It subsequently breaks down revenue, production and sales volumes, selling prices, unit costs, gross profit, and gross margin across the coal and coal chemical segments to assess each segment's contribution to earnings changes, before evaluating the financial position based on net cash, financing costs, and dividends. Its 3Q26 assessment uses a supply-demand framework, separately examining summer daily coal consumption at power plants, supply constraints caused by safety inspections, and the impact of mine suspensions in Shanxi on coking coal supply. Finally, it uses ModelWare forecasts as the basis and derives the price target through a residual income model and cost-of-capital assumptions.

Methodology notes

• Corporate Fundamentals and Financial FrameworkEarnings Quality Analysis

  Comparison of reported net profit and recurring earnings

  The report excludes one-off items and compares reported net profit growth of 6% YoY in 1H26 with recurring earnings growth of 12% YoY to identify the true change in core operating earnings.

• Industry Analysis FrameworkVolume-price decomposition

  Segment-level breakdown of sales volume, selling price, unit cost, and gross margin

  The report separately analyzes sales volume, production volume, average selling price, unit cost, and gross margin for the coal and coal chemical businesses to determine which operating variables drove the revenue decline or profit growth.

• Industry Analysis FrameworkSupply-demand framework

  Analysis of supply-demand support for coal prices

  The report uses high daily coal consumption at power plants during the summer as a demand indicator and safety inspections in major producing regions and mine suspensions in Shanxi as supply constraints to assess thermal and coking coal prices and earnings resilience in 3Q26.

• Valuation MethodRIM Residual Income Model

  Residual income price target model

  This model values future residual income exceeding the cost of equity based on the relationship between shareholders' required return and the company's ROE. The report uses the model to derive an HK$13.60 price target for China Coal Energy's H-shares.

• Quantitative/Factor/Portfolio TheoryCAPM Capital Asset Pricing Model

  Estimating the cost of equity using beta, the risk-free rate, and the equity risk premium

  The report uses a beta of 0.66, a 2.3% risk-free rate, and an 8.5% equity risk premium to calculate a 7.9% cost of equity, which serves as a key discount-rate assumption in the residual income valuation.

Asset mapping & comparison

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

• China Coal Energy H-shares (1898.HK)

  Improved coal chemical margins, coal price support, and the net cash position are favorable for earnings resilience. The report assigns an Overweight rating and an HK$13.60 price target.

  Strengths

  Coal chemical gross profit increased 62% YoY, coal gross margin remained stable, net cash totaled RMB18.0 billion, financing costs declined, and an interim dividend was declared.

  Weaknesses

  Self-produced coal output declined 8% YoY, coal unit cost of sales increased 9% YoY, and forecast net profit and ROE decline after 2026.

  Comparison

  The company's average coal selling price increased 11% YoY in 1H26, significantly exceeding the 3% YoY increase in the Qinhuangdao 5,500 kcal coal price during the same period.

  Risks

  Weak downstream demand causing coal prices to continue falling, lower oil prices reducing coal chemical margins, and mandatory mine suspensions causing further declines in production and sales volumes.

Key data

• 1H26 Net ProfitRMB8.1 billionUp 6% YoY
• 1H26 Recurring EarningsRMB8.5 billionUp 12% YoY after excluding one-off items
• Implied 2Q26 Net ProfitRMB4.3 billionUp 15% YoY and 12% QoQ, in line with market expectations
• Overall Gross Margin in 2Q2628%25% in 2Q25
• Self-Produced Coal Output in 1H26Down 8% YoYTemporary production suspensions caused by tighter safety inspections
• Average Coal Selling Price in 1H26Up 11% YoYThe Qinhuangdao 5,500 kcal coal price rose 3% YoY during the same period
• Coal Unit Cost of SalesRMB286/tonneUp 9% YoY
• Coal Gross Margin in 1H2645%44% in 1H25
• Coal Chemical Revenue in 1H26RMB10.4 billionUp 11% YoY
• Coal Chemical Gross Profit in 1H26Up 62% YoYJointly driven by higher sales volume and average selling prices
• Coal Chemical Gross Margin in 1H2622%15% in 1H25
• Net CashRMB18.0 billionThe report considers the balance sheet to remain strong
• Financing CostsDown 14% YoYDue to lower borrowing rates
• Interim DividendRMB0.184 per shareCorresponding to a 30% payout ratio
• Price Target and UpsideHK$13.60; 22%Relative to the HK$11.19 closing price on August 21, 2026
• 52-Week Share Price RangeHK$9.14-HK$15.24Market data as of the report date
• 2026 Forecast Revenue, EBITDA, and Net ProfitRMB159.7 billion; RMB43.6 billion; RMB20.0 billionNet profit on a ModelWare basis
• 2026 Forecast ValuationP/E 6.4x; EV/EBITDA 4.0x; P/B 0.7xBased on the report's forecasts
• 2026 Forecast ROE and Dividend Yield12.5%; 4.5%Based on the report's forecasts
• Residual Income Model AssumptionsCost of equity 7.9%; WACC 8.1%; ROE 8.0%; perpetual growth rate 2%Cost of equity based on a beta of 0.66, a risk-free rate of 2.3%, and an equity risk premium of 8.5%

Impact & implications

The report believes simultaneous improvements in coal chemical sales volume, pricing, and gross margin made the segment a more important source of profit contribution in 1H26, offsetting part of the impact from lower self-produced coal output and higher unit costs. In the short term, summer demand and supply constraints caused by safety inspections are expected to support coal prices and company earnings in 3Q26, while net cash and lower financing costs enhance financial resilience. Although the company is rated Overweight, Morgan Stanley remains Cautious on China's coal industry overall, and the forecast data also indicate declines in net profit, ROE, and dividend yield after 2026.

Risks

• Weak downstream demand could cause coal prices to continue falling.
• Lower oil prices could lead to deterioration in coal chemical margins.
• Mandatory mine suspensions could further reduce coal production and sales volumes.

What to watch

• Monitor daily coal consumption at power plants during the summer peak and the extent of its support for thermal coal prices.
• Monitor the duration of safety inspections in major coal-producing provinces and the impact of mine suspensions in Shanxi on coking coal supply.
• Monitor whether coal demand recovers more strongly than expected and whether realized domestic coal selling prices exceed expectations.
• Monitor whether coal production and sales volumes can increase further.
• Monitor changes in oil prices and their transmission to coal chemical product selling prices and margins.