Disappointing FY15 results; maintaining Sell
China Coal announced its FY15 IFRS-based results after the market close on 22March. Its FY15 revenue was RMB59.3bn, down 16% YoY, achieving 88% FY DBe(IFRS) and 100% Bloomberg consensus (IFRS). The company’s bottom line underIFRS was a net loss of RMB3.3bn, worse than its preliminary alert. It also missedDBe (IFRS) and Bloomberg consensus (IFRS), which were at a net loss ofRMB2.3bn and RMB2.7bn, respectively. The share price may be under pressure asthe market has not priced in this negative surprise. Without significantimprovements in the company’s operations and the coal price in FY16, we areconcerned about its further losses under the coal industry outlook; maintaining Sell.
Sluggish coal operation and weaker-than-expected coal-chem
China coal’s top line missed our expectation due to: 1) lower-than-expected ASP ofcoal operations and 2) lower-than-expected ASP and volume of China coal-chemoperations. For the coal operations, China coal’s FY15 ASP of thermal coaldecreased 21% YoY, while the spot price dropped 20% YoY in 2015. On the otherhand, unit production cost was down RMB21/t, 6.6% YoY. Excluding the cost cutfrom the coal sustainable development fund, all other cost cuts totaled RMB7.7/t.The total sales volume of self-produced coal decreased to 97.54mt, down 8.1%YoY. In terms of the coal-chem business, the company’s ASP and volume arematerially lower than our expectation.
Weak balance sheet; soaring financing costs
China Coal’s balance sheet was further weakened in 2015. Its net gearing ratioreached 80.6% as of year-end 2015 from 66.7% as of year-end 2014. In addition, itsnet financing cost has increased to RMB4.0bn, up 103% YoY, implying a netinterest rate of 5% in 2015, climbing from 3% in 2014. As we expected, 1) ChinaCoal will still have net losses in FY16 and 2) it will still have outstanding capex andis unlikely to cut its capex low enough. As such, we do not believe that the highgearing situation will reverse in the medium term.
Sluggish outlook for FY16; maintaining Sell
As the coal price seasonally softens, China Coal’s share price should see asignificant correction as a result of the company’s poor profitability and the industrydownturn. Meanwhile, the company’s book value has shrunk, thus, it is currentlytrading at 0.45x 2016 DBe BVPS, which is not attractive. We reiterate Sell on ChinaCoal with target price of HKD2.45.