EUR 850.00 For Business Accounts Only

Morningstar | China Coal’s Positive Profit Points to a Loss-Marking Fourth Quarter. See Updated Analyst Note from 31 Jan 2019

China Coal’s preliminary full-year 2018 profit guidance of CNY 4.4 billion to CNY 4.8 billion implies a net loss of CNY 0.3 billion to CNY 0.7 billion in the fourth quarter, which is slightly disappointing despite in line coal and chemical production outputs. We think the 8.8% year-over-year decline in QHD 5,500 kcal spot coal prices wasn’t enough to drive a net loss in the fourth quarter, but other factors such as rising unit production costs, inventory impairments, and falling coal-chemical prices have dampened performance. We reiterate our cautious view on the coal-chemical business, as volatile costs and chemical prices are adding risks to China Coal. We leave both our earnings forecasts and fair value estimate of HKD 4.10 per share unchanged ahead of the full-year results due out in March, pending additional details. Our long-term bearish outlook on coal prices remains unchanged, and we expect little change to our fair value estimate but anticipate 5%-8% downside to our 2018 earnings forecasts.

We think the shares are slightly undervalued, trading at only 0.4 times price/book, compared with its 10-year average of 0.6 times and our valuation of 0.5 times. Our midcycle coal price forecast of CNY 565 per ton, along with improving chemical segment profitability, suggests the company will still earn a sound operating margin of 13.7% compared with 11.7% in 2017, with healthy annual free cash flow of about CNY 6 billion.

As we expected, the QHD 5,500 kcal benchmark coal price continued its weakening trend, closing at CNY 582 per ton as of Jan. 30, 2019, down from the fourth-quarter average of CNY 630. In addition, with coal inventory at the six major power plants rising to over 30 days, compared with 10-11 days last year and a normalized 18-20 days, we think stricter safety controls that may limit coal mine output will put limited upside pressure on coal prices.

We maintain our bearish long-term coal price outlook and our midcycle assumption of CNY 565 per ton. We think growth in supply from Inner Mongolia will keep prices subdued. In addition, we think the improving coal rail-transport infrastructure, with the new rail corridor Menghua line commencing service in 2020, will also help to reduce bottlenecks and flatten the cost curve. In the long term, we think the decline in electricity-intensity of the Chinese economy and the shift toward an anything-but-coal energy policy will continue to dent coal demand and limit any material price increase.