China Coal issued loss warning for its 1H15 operations
China Coal issued a loss warning for its 1H15 operations after market close onJune 26. The company expects itself to make a net loss ranging fromRMB800m to RMB1.2bn. China Coal reported a slight loss at RMB17m (ChinaGAAP-based) in 1Q15. As such, the company has made significant loss in2Q15. Bloomberg market consensus estimates China Coal will make a loss ofc.RMB100m for 2015 full year. As such, a loss of RMB800m to RMB1.2bn isan obvious disappointment to market consensus.
Details of coal chemicals remain to be seen
1Q15 benchmark Chinese coal price (QHD 5500) was average at RMB491/t. In2Q15, the average price decline to RMB413/t. Based on the benchmark coalprice decline, we can triangulate that if the loss in 2Q15 is close to RMB1.2bn,the company’s coal chemical business might not make enough profit to offsetthe weakness of China Coal’s coal business. That might trigger furtherdowngrades for the company’s overall value as its coal chemical investmentswould not yield adequate results. We believe this will be a key element to
watch when details of 1H15 results being announced.
Outlook for coal remains challenging; reiterate Sell on China CoalEven though in the short run, coal price might have some seasonal recovery,we believe it’s very difficult for coal price to have some meaningful recoverybecause of the serious over-capacity issue of the industry. The cost curve ofChinese coal producers is sinking as well. As such, it seems very likely ChinaCoal will continue to be loss making in coming two to three years. We don’tthink this is sustainable for a loss making company trading at 0.6x 2015DBeBVPS. Sell reiterated.