1H12 results missed expectation on higher tax rate. Hidili’s 1H12 net profit came in at Rmb186mn, representing a YoY drop of 28.5% or 34% of our original 2012E full year net profit forecast. The weaker-than-expected results were attributable to: (i) higher tax rate of 32% in 1H12 (vs 21% in 1H11); and (ii) absence of FX gain (vs Rmb55m in 1H11).
Lower production cost will be partially offset ST ASP weakness. The only positive to Hidili’s results in 1H12 was the decline in production cost. Per tonne production cost for raw coal and clean coal dropped to Rmb158 and Rmb380 respectively (from Rmb168 and Rmb429) as a result of: (i) economies of scale from production ramp up; (ii) higher washing yield; and (iii) sharing of lower fixed cost as production volume lifted.
Dimmer outlook on coking coal price in 3Q12E. We further adjusted down our ASP forecast for clean coal to Rmb1,172/1,231 per tonne in 2012/13E (vs Rmb1,211/1,259 per tonne previously). Since Jul 2012, coking coal prices in Yunnan and Guizhou has been under pressure, in tandem with other regions in China due to weaker consumption of steel.
Eyeing on the execution of refinancing arrangement. Management indicted that company still has Rmb1.9bn of unused banking facilities with Rmb1.1bn relating to a 5-year LT loan, which is more than enough to cover the needs for refinancing the Rmb1.5bn convertible note due early next year. Should interest cost be under 7%, we believe Hidili’s financial cost is still controllable.
Cutting 2012E earnings by 9.5%; maintain OW. We adjusted downwards 2012E net profit by 9.5% as a result of: (i) more conservative assumption of clean coal ASP; (ii) higher tax rate; and (iii) loss incurred at associates. We cut our target price to HK$1.98, based on a blend of 5.4x 2012 PER and 0.45x 2012PB (both multiples are -1 S.D. below historical average). We believe the recent weakness on share performance have factored in market’s concerns on the uncertain outlook of coking price in 3Q12E. Maintain OVERWEIGHT.