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Darkest before the dawn
After oversupply in 2012, we expect supply-demand balance in 2013, with spot
prices stable in 1H13, a recovery in 2H13, and policy reform to support contract
players. Coal firms with high output growth, high proportion of contract sales and
low cost inflation should emerge as winners. Our top pick is China Coal. We
downgrade Shenhua to Neutral on valuation and reiterate Underperform on
Yanzhou on cost pressure. With coking coal prices bottoming out, we upgrade
Fushan to OP but reiterate Underperform on Hidili given its poor balance sheet.
Thermal coal: stabilizing spot price + contract price reform
We lower our 2013 China spot price forecast to RMB640/t (from Rmb700) and
NEWC price to US$90/t (from $100). We believe the Q1 QHD price is likely to
fluctuate around the current level (RMb620/t) as high inventory at IPPs (20 days/
84mnt) would offset strong winter demand. We see price recovery in May (presummer
stocking), with improving coal-fired power generation. 2013 contract
price reform favours contract players with railway access. We raise our 2013 and
‘14 contract price estimate by 5% and 2% respectively to RMB630/t and RMB640/t.
Balanced supply and demand in 2013
􀂃 Sequential demand improvement (4.3% in 13E vs 2.6% in 2012) based on
4.4% growth in coal-fired power generation (vs 1.2% in 2012), 5% in cement
output and 3% in steel. We expect a mild recovery but the supernormal
growth seen in the past 10 years leading up to 2010 is unlikely.
􀂃 More disciplined and uneven supply - We expect 5% production growth
with majority from the Northwest and large players. Transportation is key.
􀂃 Lower China thermal imports - We project 166mnt in 2013 (vs179mnt in
2012) due to 1) higher demand from Japan, Korea and India; 2) lower output
growth in Indonesia; 3) China price premium to seaborne unlikely to repeat.
􀂃 We expect easing cost pressures for major players due to lower government
fees & levies growth and transportation cost savings with better railway
access. Our updated coal railways table (Fig 18) show railway bottlenecks
would persist to 2015. Marginal cost of RMB650/t (~8% of thermal coal
supply) supports our medium-term prices (Fig 17).
Top pick China Coal, downgrade Shenhua to Neutral, Sell
Yanzhou
􀂃 We downgrade China Shenhua (1088HK, TP: HK$36) to Neutral on fair
valuation (12x 2013PER). We like its integrated model and low cost but with a
potential weak Q4 result, we suggest waiting for a better entry point.
􀂃 Top pick China Coal (1898HK), 2013/14F EPS raised by 16%/11%, and PT
raised to HK$10.6 (from HK$8). We like China Coal because it is set for 9%
output growth in 2013E, it is the biggest potential beneficiary of price reform, low
cost inflation, and is trading at an attractive 1x 2013E PB and 10x 2013E PER.
􀂃 Yanzhou Coal (1171HK) - raise PT to HK$10 and keep UP on deteriorating
unit profit (RMB384/t in 2011 vs. RMB144/t in 2013E), loss-making Australia
business in 2013, potential weak 4Q results and limited China spot price
upside till May.
Coking coal recovery underway
With steel demand (+4% in 2013E) recovery and steel mills restocking, we think
China coking coal prices have bottomed out and lift our 2013/14 HCC price by
3%/13% to US$188/$201. We upgrade Fushan (639HK) to OP and lift PT to
HK$3.8 on 5% div yield, 7x 2013 ex-cash PER.
麦格理 中国煤炭 2013.pdf
(1.63 MB)
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