德银-中国-金属与采矿业报告，紧平衡仍存，波幅增大-20180308-30页_3mb

China Coal Industry Summary

Core Content

This document provides an analysis of the Chinese coal industry, focusing on the supply and demand dynamics, price forecasts, and stock valuations for major players in the sector. The report highlights the continued tight balance between supply and demand, driven by limited capital expenditure (capex) and increased volatility in coal prices due to seasonal demand fluctuations and transportation constraints.

Main Points

• Supply Constraints: Investment in the coal industry fell by 12.3% in 2017, leading to limited output growth in the next 12-18 months. This is expected to result in a supply growth of only 1.3% in 2018.

• Demand Trends:

  • Domestic coal demand is forecasted to grow by 1.0-1.5% in 2018.
  • The shift in power consumption mix, with residential and commercial usage increasing from 21% in 2007 to 27.8% in 2017, has made coal demand more seasonal.
  • The government's coal-to-gas initiatives and alternative energy adoption are expected to reduce coal demand by 40-50 million tons annually.

• Price Forecasts:

  • QHD (quality hard coal) price forecasts for 2018 and 2019 have been upgraded to RMB630/t and RMB600/t, respectively.
  • Liulin No.4 coking coal price forecasts have been increased to RMB1400/t and RMB1300/t for 2018 and 2019, respectively.

• Volatility Factors:

  • Increased seasonality in power demand and winter transportation bottlenecks in the northern railway system are expected to intensify coal price volatility.
  • The Daqin Line and major Northern ports have seen high throughput, which may lead to price premiums in 4Q18.

• Stock Valuation and Investment Outlook:

  • The report recommends buying coal stocks before the expected price dip in spring.
  • Shenhua Energy (1088.HK) is highlighted as the top pick due to its attractive valuation, stable operations, and strong cash flow.
  • Yanzhou Coal (1171.HK) and China Coal Energy (1898.HK) are also recommended with Buy ratings.
  • Shougang Fushan (0639.HK) is also a Buy with a target price of HK$3.

Key Information

Updated Price Forecasts

Year	QHD Price (RMB/t)	Liulin No.4 Price (RMB/t)
2018	630	1400
2019	600	1300

Target Prices and Upside Potential

Company	Target Price (HKD)	Upside Potential (%)
China Shenhua Energy	30.5	41%
Yanzhou Coal	15.6	41%
China Coal Energy	5.2	44%
Shougang Fushan	3.0	40%

Earnings Upgrades

Company	2018E NPAT (RMB mn)	2019E NPAT (RMB mn)	% Change
China Shenhua Energy	49,265	47,088	7.5%
Yanzhou Coal	8,281	7,602	15%
China Coal Energy	4,832	4,629	4.3%
Shougang Fushan	1,216	1,229	21.5%

Valuation Metrics

Company	P/E (2018E)	EV/EBITDA (2018E)	Price/Book (2018E)
China Shenhua Energy	7.1	4.3	1.1
Yanzhou Coal	5.4	6.0	0.9
China Coal Energy	8.2	5.5	0.4
Shougang Fushan	10.1	3.7	0.8

Key Risks

• A significant macroeconomic slowdown in China is identified as a major risk to the thesis, which could impact coal demand and prices.

Top Picks

• China Shenhua Energy (1088.HK): Top pick due to its best valuation, balance sheet, and FCF yield. Target price is HK$30.5 with 45% upside potential.
• Yanzhou Coal (1171.HK): Reinstated with a Buy rating. Target price is HK$15.6 with 41% upside potential.
• China Coal Energy (1898.HK): Buy rating with a target price of HK$5.2, implying 44% upside potential.
• Shougang Fushan (0639.HK): Buy rating with a target price of HK$3, offering 40% upside potential.

Conclusion

The report emphasizes that the Chinese coal industry is expected to maintain a tight supply-demand balance in the coming years, leading to higher coal prices. Despite increased volatility, the current stock correction and attractive valuations present an opportunity to invest in the sector. Shenhua Energy is highlighted as the top pick due to its strong fundamentals and defensive characteristics, while Yanzhou Coal and China Coal Energy are also recommended with Buy ratings.