FY16 recurring results in line with expectations, Reiterating Buy
China Coal announced its IFRS-based FY16 results after market close on 22March, 2017. It’s top line reached RMB60.6bn, up 2%, representing 101%DBFY16 (IFRS) and 104% Bloomberg consensus (IFRS), respectively. ChinaCoal turned around its earnings and recorded a NPAT at RMB1.72bn in 2016,achieving 106% DBFY16 and 93% Bloomberg consensus, in line withexpectations. China Coal announced a cash dividend of RMB0.039 per share.
Coal operation: strong results and should further improve in 2017
The company’s coal operation is better than expected mainly due to higherASP of self-produced coal (c.RMB20/t higher than DBe) and greater costcontrol (c.RMB10/t lower than DBe). At the analyst meeting, the managementseemed optimistic on 2017 full year coal price . Although unit cost may inflatein 2017, gross profit per tonne is still likely to further expand by c.RMB40~50/tin 2017, based on our latest 2017 coal price forecast at RMB609/t. Consideringthe uncertainty of 276-day policy, the management guides to flat sales volumeof 80mt in 2017, but with some potential upside risk. As such, we expect coaloperation may incrementally contribute c.RMB4000m gross profit in 2017.
Coal-chem: shrinking unit gross profit in 2016, may still be under pressure in2017
Gross profit per tonne of olefin and urea shrank by RMB 828/t YoY andRMB179/t YoY, squeezed by declining ASP and escalated cost. China Coal maycontinue to face these headwinds in 2017. Based on our latest coal priceforecast, unit cost of olefin and urea should further increase by c.200-300RMB/t and RMB150-200/t, respectively. Although the company projects1mt olefin sales volume, up 41% YoY, total gross profit improvement in 2017should be very limited due to 1) declining urea sales volume projected, down9%, 2) limited methanol for external sales and 3) further shrinking unit grossprofit.
Slightly lower net gearing ratio but CAPEX to remain heavy in 2017
By accumulating cash flow from operation & paying back debt in FY16, ChinaCoal improved net gearing ratio from 81% as of FY15 year-end to 78% as ofFY16 year-end. We don’t expect net gearing to further improve seeing theheavy CAPEX planned. China Coal announced to place RMB15.2bn in 2017, up10% YoY, while operating cash flow is c. RMB12bn as we expected.
Remain positive on coal price, Buy reiterated
Based on our latest coal price forecast of FY17 at RMB609/t, we believeChina Coal should be the beneficiary of resilient coal price in the next 3 years(4-6% ROEs) and should realize strong YoY improvement in 2017. We factoredin FY16 results into our forecast trajectory. We keep our HK$5.35 TP (based onPBx/ROE valuation) unchanged. With c. 30% upside potential, Buy reiterated.Major risks: serious macro deterioration.