• We estimate Sembcorp Industries achieved S$12m of reported profit for 1H21 (-94% h-o-h) with the S$212m impairment expected for the Chongqing 1,320MW coal plant. The impairment was the result of rising coal price that had wiped out Sembcorp Industries’s 49% interest in the plant amounting to S$212m.
• Sembcorp Industries's 1H21F results will be out on 6 Aug. We keep our ADD rating and target price of S$2.43 (still based on 15x CY22F P/E, in line with Asian peers).

S$212m Impairment for Coal Arm Chongqing Songzao

• Sembcorp Industries (SGX:U96) warned of S$212m impairment for its 49%-owned JV in its 1H21 results.
• Chongqing Songzao operates a 1,320MW nine-mouth coal-fired power plant in China with coal procured from Chongqing Energy (CQE), its JV partner. Chongqing Songzao turned to other provinces for coal supply following CQE’s closure of its Chongqing-based coal mines. Import of coal translates into higher costs, tightening margins and affecting future profitability expectations of the plant.
• Alongside the 93.0% year-to-date increase in coal prices, we estimate Sembcorp Industries’s FY21F net profit to be 80% of FY2020’s. Assuming steady operations, China’s 1H21F is expected to bring in a 5% increase in net profit from 2H20. Sembcorp Industries operates one other 2,640MW coal plant in India through SEIL.

Foggy Outlook for Coal Demand, Future Revenues May be Affected

• In line with China’s Green Plan to achieve carbon neutrality by 2060, President Xi announced plans to strictly limit the increase in coal consumption in 2021-2025 and phase it down in 2026-2030. China, the world’s largest producer and consumer of coal, aims to achieve 13.5% reduction in energy consumption per unit of GDP by 2025. Sembcorp Industries’s topline for coal will likely be affected.

Turn to Renewables

• Recall that Sembcorp Industries plans to energy in FY25 (up from 2.6GW in FY20) and increase its share of net profit from Sustainable Solutions to 70% in FY25 (up from 40% in FY20).

Sembcorp Industries' 1H21 Earnings Preview

• Sembcorp Industries's 1H21F results will be out on 6 Aug.
• We estimate Sembcorp Industries achieved S$12m of reported profit for weak wind conditions.

• Key risks: future impairments, higher credit costs.
• Potential catalyst: renewable investment

Source: CGS-CIMB Research - 2 Aug 2021