Hidili is the largest private coking producer in Southwest China. In FY12, we expectHidili to achieve revenue of RMB 3,021mn, up 6% yoy, and achieve net profit of RMB581mn, down 19% yoy. EPS in FY12 is expected to be RMB0.281, down 19% yoy. Rawcoal production is expected to reach 5.0mn tones, up 18% yoy, and clean coal productionand sales is expected to reach 2.0mn tones, up 16% yoy. Clean coal ASP in FY12 isexpected to reach RMB1,202/t, down 8% yoy.
Competitive edges: 1) Fast capacity expansion. Hidili’s annual raw coal miningcapacity is expected to eventually reach 14.1mn tonnes, over 3 times its productionvolume of 4.1mn tonnes in 2011. Hidili guided for raw coal production volume in FY12and FY13 of 5.0mn tonnes and 6.0mn tones, up 22% and 20% yoy. 2) Unit cost mightreduce. Unexpected accidents in Guizhou in 2011 have increased unit cost. We expectHidili’s unit cost to decline in FY12-13 as raw coal production increases. Furthermore,Guizhou local government postponed the price adjustment funds in 2012. 3) Goodcoking coal demand outlook in Southwest China. Currently, urbanization ratio inSouthwest China is only 40% and infrastructure construction progress might acceleratein the 12th Five Year Plan. Currently, there are over 10.0mn tonnes of blast furnacecapacity under construction, including Pangang, Chongiqng Iron&steel, and Kunsteel.
We set our TP at HKD 2.50 and investment rating of ‘Accumulate’. Our EPSestimates for Hidili in FY12-14 are RMB0.281, RMB0.349 and RMB0.389. We initiate ourTP at HKD 2.50, representing 7.1x 2012E PE and 5.7x 2013E PE, discount to peers dueto smaller scale of mines, volatile recovery ratio, and worse coking coal resources thanMMC (975.HK) and Shougang Resources (639.HK).
Risk: Lower than expected raw production volumes, volatile recovery ratio, coking coalprice below expectations, and unexpected accidents.