Guizhou Xiangshui Coal Mine Accident. At 11 o’clock on Nov 24th, the Xiangshui Coal Mine, under Panjiang Coking Coal Group, had an accident, causing around 23 deaths. According to former experiences, all the coal mines in Guizhou will suspend production and go through safety checks for at least a quarter. Hidili’s raw coal production in Guizhou might be suspended, in which case total production would be reduced by 0.5mn tonnes, representing 12.5% of annual production. Meanwhile, unit clean coal production cost will surge due to less economies of scale. We revise down our FY12-14 raw coal production estimates to 3.75mn tonnes, 4.00mn tonnes, and 5.00mn tonnes, respectively.
Key points: 1) Coal mine accidents in Sichuan and Guizhou have great impact on Hidili’s operation. We consider the high probability of coal mine accidents in Sichuan and Guizhou is due to some features of local mines: relatively small scale, relatively more manual mining systems, and high gas level. The Company needs to operate steadily for at least 2-3 months to stabilize market expectations. 2) Fundamentals are bottoming out but recovery is very low. Currently, 2013 GDP expectations only reached 7.0%-7.5%, no improvement compared to 2012. We think demand of steel industry will not improve and the probability of steel price hike in 2013 is small. In 1H13, property destock might happen in 3rd & 4th Tier cities, leading to declining new floor space started and reducing construction materials. 3) Balance sheet is worsening further. As the Company’s production declines, its clean coal production cost will surge, worsening its balance sheet.
Maintain TP at HKD1.20 and downgrade investment rating to ‘Reduce’. We revise down our EPS estimates for Hidili in FY12-14 to RMB0.051, RMB0.094 and RMB0.130, respectively. Maintain TP at HKD1.20, representing 19.0x 2012E PE and 10.3x 2013E PE. Downgrade investment rating to ‘Reduce’ .