德银-中国-金属与采矿业-中国煤炭业：近期反弹之后，风险回报发生分化-20180130-12页_816kb

China Coal Industry Analysis - 30 January 2018

Core Content

This report provides an industry update on the China coal sector, focusing on the QHD (QingHua Da) coal price and the performance of two major coal companies: China Shenhua Energy (1088.HK) and China Coal Energy (1898.HK). The analysis includes market trends, financial performance, valuation metrics, and investment recommendations.

Key Industry Insights

• QHD Coal Price: The QHD coal price (5500 kcal FOB, VAT included) reached RMB742/t last week. Due to cold weather and low coastal IPP (Independent Power Producer) inventory days, the price may still have room to increase over the next one to two weeks.
• Demand and Supply Balance: In February, coal demand is expected to drop by ~20% compared to January due to the CNY (Chinese New Year) holidays. However, the Chinese government has instructed SOEs (State-Owned Enterprises) to maintain normal production during the holiday period, which could ease the supply-demand imbalance.
• Price Correction Outlook: The report suggests that a price correction in QHD coal may occur in February, which could affect sentiment in the coal equity market.
• Risk-Reward Deterioration: After recent rallies in both coal prices and equity prices, the risk-reward ratio for the coal sector has deteriorated, indicating that the upside potential may not justify the current valuations.

Company Performance and Valuation

China Shenhua Energy (1088.HK)

• Price Performance (30 Jan 2018): HKD 24.10
• Target Price: HKD 28.50
• 52 Week Range: HKD 15.44 - 24.75
• Market Cap: HKDm 479,349 (USDm 61,316)
• Financial Highlights:
  • 2018 Full-Year DBe NPAT: RMB60.0 billion
  • P/E Ratio (DB): 8.8x (2018)
  • P/E Ratio (Reported): 8.8x (2018)
  • P/BV Ratio: 1.2x (2018)
  • ROE: 15.9% (2018)
• Key Metrics:
  • Sales Growth (2018E): 29.3%
  • EBITDA Margin (2018E): 43.6%
  • Net Debt/Equity (2018E): 13.5%
  • Dividend Yield (2018E): 7.1%
  • FCF Yield (2018E): 15.2%

China Coal Energy (1898.HK)

• Price Performance (30 Jan 2018): HKD 4.16
• Target Price: HKD 5.35
• 52 Week Range: HKD 3.35 - 4.29
• Market Cap: HKDm 55,156 (USDm 7,055.3)
• Financial Highlights:
  • 2018 Full-Year DBe NPAT: RMB8.0 billion
  • P/E Ratio (DB): 10.0x (2018)
  • P/E Ratio (Reported): 10.0x (2018)
  • P/BV Ratio: 0.48x (2018)
  • ROE: 5.4% (2018)
• Key Metrics:
  • Sales Growth (2018E): 3.4%
  • EBITDA Margin (2018E): 26.3%
  • Net Debt/Equity (2018E): 66.3%
  • Dividend Yield (2018E): 3.0%
  • FCF Yield (2018E): 11.3%

Investment Recommendations

• Top Buy: China Shenhua Energy (1088.HK) is recommended as the top Buy in the coal sector, despite the potential for price correction in February.
• Buy: China Coal Energy (1898.HK) is also recommended as a Buy, with the expectation of continued growth and improved margins.

Risk and Caution

• The report suggests that investors should stay defensive in their coal sector investments due to the potential for a price correction and the risk-reward imbalance.
• The analysis notes that while there is high conviction in the RMB600/t QHD coal price assumption for 2018, the recent price rally may have already priced in this expectation.
• There are conflict of interest disclosures, including the fact that Deutsche Bank and its affiliates may have received compensation from the companies and may hold equity or debt securities.

Summary

The report highlights the recent price rally in both QHD coal and coal equities, with a warning that the price correction in February may impact investor sentiment. It recommends a defensive stance in the coal sector, with China Shenhua Energy as the top Buy and China Coal Energy as a Buy. Valuation metrics suggest that both companies are currently trading at a discount to their 2018 earnings, but the potential for price correction and the high valuations of the equities may have already reflected expectations, leading to a deteriorated risk-reward ratio.