Volume dropped significantly in 3Q12 and uncertainty remains for 4Q production volume
Hidili announced its 3Q12 operational data this morning (Oct 12). According to company's disclosure, Hidili produced 956kt raw coal and 439kt clean coal in 3Q12, which implied 20% and 24% YoY decline, respectively. The volume drop is mainly due to production halt of all coal mines across Panzhihua, Sichuan for inspection after the gas explosion accident of Xiaojiawan mine (Zhengjin Industry and Trade Co., Ltd) on 29 August 2012. So far, mines in Panzhihua are still under suspension and resumption time yet to determine. Thus, we are concerned about Hidili's 4Q production volume as well. This might imply Hidili's 2012 FY production volume might disappoint the market consensus.
Sales volume even worse
Despite the disappointed production volume, Hidili’s sales volume concerns us more. According to the release, its clean coal sales dropped to 254kt in 3Q12, recorded 43% YoY and 47% QoQ decline. We believe this is mainly due to the weak steel demand across the region. Also, our recent channel check shows steel mills are still reluctant to raise their raw material inventory, which may results in a higher inventory level for Hidili.
ASP in line with our expectation
In the mean time, Hidili’s clean coal and coke ASP is as weak as we expected. In 3Q12, its clean coal and coke ASP is RMB1,052/t and RMB1,305/t, dropped 22% and 25% YoY, respectively. Meanwhile, Liulin No.4 (China coking coal benchmark price) is down by 20% YoY in the same period. Though we don’t see much downside in coking coal price in 4Q12, we also don't see strong coking coal price uptrend playing out as the strong catalyst in 4Q12. We believe steel demand remains sluggish in China in 4Q12 and recent restocking activities can be short lived.
Cautious review remained, maintain Sell on Hidili
Considering Hidili’s uncertainty of production resumption in 4Q12 and weak steel demand, we still see downside for FY12 earnings. Also, Hidili’s escalating gearing and financial costs continue to concern us. Thus we maintain our cautious view for Hidili and Sell rating maintained.