Event
Welowerour2014/15Ethermalcoalpriceforecastsby5%/4%toRMB550/530pertonne.Weseeashort-termreboundinlate2Qandbelievethepricewilllikelyfluctuatearoundthecostcurveinthemediumterm.
Wecutour2014Ecokingcoalpriceforecastby7%toRMB1,000/t(-12%y-y)butretainourpreviousy-ygrowthforecastin2015-18E.Theoversupplysituationappearsmuchworsethanouralreadybearishview.
Impact
Thermalcoal-amildreboundinlate2Q:Thedomesticthermalcoalpricehaddropped16%toRMB530/tasof8April.Currentpriceiswellbelowthemarginalcostandweseelimiteddownsidegivensomeproductioncutstarts(InnerMongolia2M14output-12%y-y).WeexpectamildpricerecoveryinlateMay/earlyJunegiventheslowdownofcoalimports,postDaqinrailwaymaintenanceandIPPpre-summerstocking.
Medium-termpricetofluctuateatorslightlybelowmarginalcost:Weexpectdemandgrowthtoslowto2-3%in2014-16E;whilesupplygrowthisalsounderconstraintbecaseoftheweakprice.Weseeoversupplycontinuingat125-137mntfrom2013-16E.Meanwhile,thecostcurveislikelytograduallyshiftdownthankstofeeclearanceandlowertransportationcosts.
ContractsalespricehelptostabiliseASP:Shenhua’scontractpricesaresetquarterly,andifquarterlyspotpricelessthan5%,contractpricewillnotchange.ForChinaCoal,40%oftotalcoalsalesarefixedataRMB560/t.
MorebearishincokingcoalgivenlargesupplygrowthfromShanxiandseaborne;theslowdowninsteeldemandgrowth;andthefactthatpricehasnothitmarginalcostyet(ie,unlikelytoseemeaningfulsupplycuts).ChinaHCC(LiulinNo.4)hascorrected20%YTDandweexpectittoremainweakin2014.
Stockpick
Shenhua(1088HK,N,PT:HK$24):WelowerShenhua2014/15EEPSby6%/13%onASPcut.Itisourmostpreferredcoalnamethankstoitsintegratedmodelandthestronggrowthfromnon-coalbusiness(power/railway)largelyoffsettingtheweakcoalprice.However,wesuggestthatinvestorswaitforbetterentrypoints.
ChinaCoal(1898HK,N,PT:HK$4.2):Wecut2014/15EEPSby34%/42%butkeepourDCF-basedPTatHK$4.2onlowercapexassumptions.Wekeepourcautiousviewgivenitshighsensitivitytotheweakcoalprice.Weseeitasbetaplaythisyear.Suggestprofit-takinginthewakeofthe12%risesinceitsearnings.
YanzhouCoal(1171HK,UP,PT:HK$5):Wecut2014EPSby29%butraise2015EPSby17%.Sellgivenits24%exposuretolow-qualitycokingcoalandthebigcostcutin2013maybehardtorepeatin2014.With>50%2014EPSdrop,3%ROE,thecurrentvaluationof20xmid-14/15PERisdemanding.
Yitai(3948HK,N,PT:HK$9.5):MaintainNeutral;Weremaincautiousonitsproductiongrowth,largecapexplanandlowstocktradingvol.Fushan(639HK,UP,PT:HK$2):MaintainUnderperformonlimitedoutputgrowthandpureexposuretoveryweakcokingcoalprice;Hidili(1393HK,UP,PT:HK$0.4):likelyloss-makinguntil2016withhighgearingconcern;maintainUnderperform