1Q16 losses milder than DBe and Bloomberg consensus
China Coal announced its 1Q16 PRC GAAP results and IFRS results aftermarket close on March 27. Its 1Q16 revenue was RMB 12,512m, achieving18% of 2016 full year DBe (IFRS) and 24% of Bloomberg consensus (IFRS).China Coal has a net loss of RMB223m both under GAAP and IFRS in 1Q16,while DBe (IFRS) and Bloomberg consensus (IFRS) are forecasting an FY 2016net loss of RMB2,121m and RMB3,279m, respectively. The company’s 1Q16net loss is milder than we expected.
Coal: weak ASP but cost reduction offset some of the weakness
China Coal’s coal production volume was up 21% YoY but down 23% QoQ. Itstotal ASP in 1Q16 has increased to RMB275/t (up RMB1/t or 0.5% QoQ), whilebenchmark QHD ASP climbed by RMB11/t, or 3% QoQ. China Coal’s overallASP improvement in 1Q16 lagged the market. ASP of China Coal’s selfproducedcoal hiked by RMB3/t while ASP of trading coal dropped by RMB2/t.
Though its ASP improvement was weaker than the benchmark, China coal
managed to cut the unit cost by RMB23/t, mainly because of the unit materialcost decline from 59RMB/t in 4Q15 to 36RMB/t in 1Q16. Thus, China Coal wasable to reduce its losses from its coal operations in 1Q16.
Chemical: strong profitability for olefins but weak for urea
Sales volumes for the two most important contributors, olefin and urea,increased 3% QoQ and 34% QoQ, respectively. GP/t for olefin improved byRMB724/t. The olefin business contributed about RMB510m to China Coal’sGP, which is China Coal’s most profitable business. Nevertheless, theprofitability for urea deteriorated QoQ. GP/t declined RMB195/t QoQ in 1Q16.As such, even though urea sales volume growth QoQ in 1Q16 was very strongat 34%, the GP contribution was only c.RMB320m (similar to 4Q15).
Weak balance sheet and negative cash flow from operation
China Coal’s net gearing continues to climb, reaching 83% at the end of 1Q16,from 79% at FY15 year end. The main reason is the decreased cash and lowerbook value due to the losses. In addition, negative cash flow from operationsremains a concern though cash flow from investment was cut significantlyfrom RMB8,278m in 4Q15 to RMB941m in 1Q16.
Outlook remains challenging in FY16; Sell maintained
China Coal’s 1Q16 losses are milder than expected, and recent supplyrestrictions might help to improve the demand/supply balance in the near term.However, structural oversupply remains as overall coal capacity in China hasnot been well rationalized and Chinese coal demand should continue todecline. China Coal is currently trading at 0.5x 1Q16 trailing BVPS amid its lossmaking situation. We think the valuation is rich and continue to rate China CoalSell.