Event

We lower our China Coal 2013-15E EPS by 17%/26%/36% on the back of 1)1-2% ASP cut in 2014-15F by factoring in our latest HCC price assumptions;and keep our thermal coal price assumptions unchanged (QHD price atRMB580/ RMB550/t in 14/15F); 2) increase in 2013-15F unit costs by 3-4%due to higher transportation costs. We cut our DCF-based price target toHK$4.2 (from HK$5.2) and keep our Neutral rating. The stock has correctedover 20% since 9 Dec and is trading at 0.5x 2014PB, which has largely pricedin our cautious view on coal prices.

Impact

Potential earnings miss for FY13: The company issued a profit alert in lateJan, indicating NPAT under PRC GAAP would drop 55%-65%. We estimateFY13 NPAT under IFRS to be RMB4.1bn, or EPS of RMB0.31 (-54%y-y),implying 2H13 EPS of RMB0.064 (vs. 1H13 RMB0.24) given 1) benchmarkthermal coal price drop by 9.4% H-H; 2) higher unit cost in 2H13 (FY13 unitcost +5%y-y vs. 1H13 unit cost -5% y-y).

We raise 2014-15F unit cost by 3-4% due to railways freight rate hike: On17 Feb, the NDRC announced a freight rate hike of RMB0.015 tonne/km forthe Daqin line (653km length) and other state-owned railways; and a base 2rate rise from RMB13.6/t to RMB15.5/t. China Coal transports ~80mnt of coalvia the Daqin line. In our view the hikes lead to ~RMB10/t rise in thecompany’s transport cost or ~3% in total unit cost of self-produced coal. Dueto the ongoing over-supply situation, it is unlikely to pass on the cost increaseto downstream users.

We maintain our cautious view on China’s thermal coal price. As of 24Feb, the benchmark coal price has fallen to RMB545/t from RMB630/t at thebeginning of the year. In the near term we expect prices to remain weak givendecline in demand during the off-peak season, weak international prices andrelatively high inventory. Yet, downside risk may be limited given the price isat marginal cost again. The next positive catalyst may come in May withDaqin railway maintenance and IPP pre-stocking for summer demand. In themedium term, we expect prices to fluctuate at the cost curve, and keep our2014/15F price assumptions unchanged at RMB580 / RMB550/t.

Earnings and target price revision

Cut 2013/14/15E EPS by 17%/26%/36% and PT to HK$4.2 from HK$5.2.

Price catalyst

12-month price target: HK$4.20 based on a DCF methodology.

Catalyst: Coal price rebound on stronger downstream demandAction and recommendation

We cut our 2013-15F EPS by 17-36% after factoring in a railway freight ratehike and lower HCC prices. We see a potential FY13 earnings miss due tohigher HoH unit cost in 2H13. The stock has corrected over 20% since 9 Dec;we keep our Neutral rating as we see current valuation of 0.5x2014PB as fairfor the 5% ROE company.

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