1H12 results of Hidili below expectations. In FY12, revenue reached RMB 1,264mn, up 12.1% yoy, in-line, but net profit reached RMB 186mn, down 28.7% yoy, far below expectations. EPS reached RMB0.09, down 19% yoy. Raw coal production reached 2.1mn tones, up 20.4% yoy, and clean coal sales reached 0.83mn tones, down 20.4% yoy, in-line. Clean coal ASP reached RMB1,167/t, down 13.3% yoy, below expectations. We consider the unexpected loss from non-operating activitis is the main reason its 1H12 results below expectations.
Negative catalysts: 1) 2H12 production volumes far below expectations. In Aug 29th, there was a big coal mine accidents and Sichuan local governments in might suspend all coal mines in Sichuan for safety check for at least a quarter. Meanwhile, as coking coal price slid very quickly, with ASP in Guizhou and Sichuan at RMB970/t and RMB900/t respectively, Hidili might suspend some high cost coal mines in Guizhou and Yunnan. We cut our FY12-13 raw coal production volume estimates to 4.0mn tonnes and 5.0mn tonnes. 2) Hidili might break even in 3Q12. In 1H12, Hidili showed some good changes as its raw coal production growth in-line and unit cost reduction better than expectations, with total clean coal production of RMB950/t. However, production reduction might increase its production costs further, driving Hidili into breakeven. 3) Finance costs increased largely. Hidili pledged the shares of its subsidiaries to Huaneng Trust to gain RMB1.5bn loans to payback its convertible loans, with borrowing costs at around 12% and terms of 2 years, leading to fast increasing finance costs. Meanwhile, Hidili announced to accelerate capital expenditures to RMB1.2bn, with net gearing of over 80% at year end.
Cut TP to HKD 1.0 and downgrade investment rating to ‘Neutral’. Our EPS estimates for Hidili in FY12-14 are RMB0.102, RMB0.154 and RMB0.195. We cut TP to HKD1.0, representing 7.8x 2012E PE and 5.2x 2013E PE.