Poor 1H15 results for China Coal; re-iterating Sell
China Coal announced 1H15 results after market close on 21 August. Thecompany’s revenue at RMB29.7bn only achieved 44% of our 2015FY estimatesand 46% of Bloomberg 2015FY consensus. Its 1H15 NPAT loss of c. RMB1bnis 47% of our 2015FY estimates (RMB2.3bn net loss) and 72% of 2015FYconsensus (RMB1.5bn net loss). It announced a profit warning on 26 June, andthus we don’t think the big loss is a big negative surprise to the market. Theresults summary tables can be found in the following pages.
China Coal still struggling in its major coal business
China Coal’s 1H15 coal ASP declined RMB44/t HoH. The ASP decline is largerthan the benchmark price fall at RMB39/t HoH (VAT-excluded). We believeChina Coal’s relatively weak coal quality let its ASP drop larger than themarket. The company has done a good job of cost reduction at RMB9/t HoH.However, the cost reduction could not offset ASP weakness. The companyreported only RMB376m gross profit in 1H15. With the China benchmark price(QHD 5500kcal) already falling RMB60/t from the 1H15 average price, webelieve China Coal will likely see a gross loss higher than RMB1bn in 2H15.
Impressive profits from coal chem business but that spikes financial costs
China Coal reported RMB1.6bn gross profit for its coal chem business in 1H15.We think this is a positive surprise to the market. The good profitability ofChina Coal’s coal chem business results from a utilization rate ramp-up fornew facilities (poly-olefins and urea units), resilient product prices, and cheapcoal costs. In 2H15, we believe the good profit might sustain as the coal price(cost for coal chem) fall offsets the price weaknesses of chemical products.However, the ramp-up of coal chem facilities boosted China Coal’s financialcosts an additional RMB900m HoH. China Coal’s effective interest rate alsospiked from 3.3% in 2H14 to 4.9% in 1H15. As such, good coal chem profitsare unlikely to lead the consensus 2015/16 NPAT estimates to be increased.
Valuation and Risks
As we discussed in “Darker days ahead for China’s coal industry,” publishedon 3 August 2015, we believe it’s still tough for China to tackle its overcapacityissues in the coal industry. With a poor coal price and spiked financial costs,China Coal will still suffer bad losses in the coming two years. We reiterate ourSell rating on China Coal. Our TP at RMB2.45 is derived from DCF-based SOTPwith a 6.1% WACC and 2% TGR, in line with potential long-term coal demandgrowth.. Major risk: Dramatic changes in China policies.