20140121-Maybank_KERPL-CHINA_COAL_ENERGY__1898.HK_LOWERING_EPS_TARGET_PRICE_11页_559kb

China Coal Energy (1898 HK) Summary

Core Content

China Coal Energy (1898 HK) is a company operating in the coal and chemicals sector with a current share price of HKD4.14 and a market capitalization of USD7.1B. The target price has been revised down to HKD4.00, a decrease of 3%, based on a PBR (Price to Book Value) of 0.4x the forecast 2014 book value and an ROE (Return on Equity) of 4.5%. The report highlights the company's financial performance, valuation metrics, and future outlook, emphasizing the challenges in the coal industry and the impact of new growth initiatives on its financials.

Main Views and Key Information

Financial Performance

• EPS (Earnings Per Share):
  • 2013E: CNY0.38
  • 2014E: CNY0.36
  • 2015E: CNY0.39
  • EPS growth is expected to be negative in 2014 and 2015, with a forecasted 7% decline in FY14 net profit compared to FY13.
• Core Net Profit:
  • FY13E: CNY5,091.6m
  • FY14E: CNY4,733.3m
  • FY15E: CNY5,180.5m
• Net Dividend Yield:
  • FY13E: 3.6%
  • FY14E: 3.3%
  • FY15E: 3.6%
• ROE (Return on Equity):
  • FY13E: 4.9%
  • FY14E: 4.4%
  • FY15E: 4.7%
• Net Debt to Equity:
  • FY13E: 69.2%
  • FY14E: 83.7%
  • FY15E: 92.6%
  • Expected to more than double in two years.

Valuation Metrics

• PBR (Price to Book Value):
  • 2014E: 0.5x
  • 2015E: 0.4x
• Core P/E (Price to Earnings):
  • 2014E: 9.0x
• EV/EBITDA:
  • 2014E: 9.6x
  • 2015E: 9.3x

Coal Price and Cost Forecast

• China Coal Price (CNY/t):
  • 2013E: 617
  • 2014E: 617
  • 2015E: 629
• Total Coal Cost (CNY/t):
  • 2013E: 329
  • 2014E: 334
  • 2015E: 337
• Coal Production (mn t):
  • 2013E: 119
  • 2014E: 124
  • 2015E: 128
• Coal Sales Volume (mn t):
  • 2013E: 161
  • 2014E: 163
  • 2015E: 170

Key Catalysts and Outlook

• Earnings Trends:
  • Earnings fell 54% YoY for 9M13, with no improvement expected in 4Q13.
  • Coal prices are expected to remain flat in 2014 and decrease by 5% by the end of June 2014.
• New Growth Initiatives:
  • The company is investing heavily in coke/chemicals and energy, which are expected to remain loss-making for the next few years.
  • The Dahaize green-field mine project in Shaanxi is expected to take 5.5 years to construct and has a forecasted IRR of 20%.
• Market Supply and Demand:
  • Coal demand growth is slowing, with thermal coal demand expected to decrease by half by 2020.
  • Coal prices have been affected by seasonal demand and inventory levels, with inventory at power plants at 22 days, above normal.
• Valuation Approach:
  • The target price is based on a PBR of 0.4x and a revised ROE of 4.5%.
  • DCF (Discounted Cash Flow) valuation is not applicable due to negative cash flow and high capex.

Conclusion

The report maintains a HOLD recommendation due to limited downside to the revised target price and the continued weak profit trend. The company's financial performance is expected to remain under pressure due to flat coal prices, rising costs, and high capital expenditures. The new growth initiatives are not yet profitable and may further increase the company's leverage. The coal market in China is facing slowing demand and supply, which could have long-term implications on the company's profitability.