20140911-Maybank_KERPL-Coal_prices_bottoming__U_G_to_BUY_12页_742kb

China Coal Energy (1898 HK) Summary

Core Content

China Coal Energy is a Hong Kong-listed company in the materials sector, currently rated BUY (Upgrade) with a target price of HKD5.50, representing a 15% increase from its previous target of HKD3.25. The company's market capitalization is HKD63.2B, and its average daily trading volume is USD13M. The current share price is HKD4.77.

The report highlights that coal prices are bottoming, with a forecast of 5% increase by year-end 2014 and 10% by year-end 2015. This is driven by a slowdown in coal production growth, seasonal recovery, and stabilization of industrial demand. The government is also providing support through measures such as restricting coal imports and potentially delaying the implementation of a coal resource tax.

Main Points

• Coal Price Forecast:

  • Moderate increase of 5% expected by the end of 2014.
  • 10% increase expected by the end of 2015.
  • Prices are expected to stabilize in the long-term.

• Valuation and Performance:

  • The target price (HKD5.50) is based on a P/BV of 0.6x, which is in line with historical valuations.
  • The company's ROE is expected to improve from 0.8% in 2014 to 2.3% in 2016, driven by rising coal prices and stable unit costs.
  • Share price performance has been mixed, with a 3-month return of 10.9% and a 12-month return of -8.8%, while it has underperformed the market index by -15.2% over the past year.

• Earnings and Profitability:

  • The core net profit is forecast to increase significantly in 2014 and 2015, with core EPS growing by 137.2% in 2014.
  • Earnings are expected to stabilize in 2015 and 2016, with core EPS reaching CNY0.15 and CNY0.18, respectively.
  • Net DPS is expected to rise slightly, from CNY0.02 in 2014 to CNY0.05 in 2016.

• Recommendation:

  • The report recommends buying on dips.
  • Investors are advised to pair a long position in coal with a short position in steel, as steel prices are expected to fall due to weak demand and surplus capacity.

Key Information

• Major Shareholders:

  • Sino Life Insurance Co. Ltd. (7.0%)
  • GIC Pte Ltd. (4.4%)
  • China State-Owned Assets Supervision & Administration (3.2%)

• Financial Highlights:

  • Revenue is forecast to decline in 2014 but stabilize in 2015 and 2016.
  • EBITDA is expected to decrease in 2014 but rise in 2015 and 2016.
  • Net profit is forecast to decline in 2014 but increase in 2015 and 2016.
  • Net debt/equity is expected to rise from 38.5% in 2014 to 116.3% in 2016.

• Valuation Metrics:

  • P/BV: 0.6x (consistent with historical levels)
  • EV/EBITDA: 17.6x in 2014, decreasing to 14.8x in 2016
  • Core P/E: 5.7x in 2014, increasing to 21.0x in 2016

Regional Coal Company Comparison

• Shenhua and China Coal are both rated BUY, while Yanzhou Coal is rated HOLD.
• China Coal is preferred due to its stronger earnings leverage and less exposure to coal resource tax.
• Yanzhou Coal may benefit from higher coal prices but is at risk due to Australia assets with low profit margins and lower earnings transparency.

Strategic Considerations

• Market Sentiment: The coal market is rebalancing, with prices bottoming and a mild seasonal recovery expected.
• Macroeconomic Factors: Improved macroeconomic conditions and production cuts by SOEs are supporting the price recovery.
• Investment Strategy: The report suggests a contrarian BUY on the expectation of a moderate price increase and state support.

Risk Factors

• Structural Challenges: The coal sector faces long-term structural issues such as low demand growth and spare production capacity.
• Debt Levels: The company's net debt/equity is expected to increase, indicating a higher financial risk.
• Steel Sector: Steel prices are in a downward trend, and steel producers lack pricing power, suggesting a short position may be beneficial for investors.

Conclusion

China Coal Energy is positioned to benefit from the bottoming coal prices and state support, with a moderate upside expected in the short to medium term. The target price of HKD5.50 reflects a revised P/BV of 0.6x and forecasted ROE of around 2%. Investors are advised to BUY on dips and consider a long in coal and short in steel strategy to enhance returns. The company's financial leverage and debt levels are expected to rise, which could be a concern for long-term investors.