中煤能源(601898)

Chinacoal FY18A NP was Rmb4.49bn, or EPS of Rmb0.34/sh, up 33% YoY. Excludingone-off items including assets impairment and gain from FX, recurring profit wasRmb5.41bn, up 12% YoY. The result is inline with our estimates but 5% belowBloomberg consensus.

Sales of self-mined coal were 76.7mnt for FY18A, up 2.2% YoY and 8.5% higherthan our estimates, mainly due to contribution of two new mines (Muduchaidengand Nalinhe) in the last two months of the year. Unit ASP of self-mined coal wasRmb508/t, up 3.0% YoY, 3% lower than our estimate. Specifically we note that ASPin 4Q18 decreased to Rmb466/t, down Rmb49/t QoQ, weaker than the trend ofQHD5500 spot price, likely driven by lower ASP of the new mines. Cost control wasbetter than expectations – unit production cost was stable at Rmb234/t, down 1.8%YoY and 4.8% lower than our estimate. Unit transport cost was Rmb91/t, flat YoYand inline with our expectation.

Coal chemicals, including PP/PE, urea and methanol, contributed Rmb3.21bn ingross profit in FY18A, or 17.6% of the total, up 34.7% YoY, driven mostly by strongvolume growth (50.2% growth in PP/PE), while pricing remains strong.

Balance sheet improved slightly with net gearing decreasing to 84% in FY18 versus89% in FY17. The A/R days was 52 days (71 days in FY17), down 27% YoY. Theinventory days was 35 days (42 days in FY17), down 17% YoY. Operating cash flowincreased by 16% YoY and ahead of our expectation due to lower receivables.

Growth outlook remains intact: We remain positive on Chinacoal’s productiongrowth in the coming years. We estimate three new assets (Nalinhe, Muduchaidengand Xiaohuigou) will start to contribute meaningfully in 2019E, boosting commercialcoal output by 11% to 86mnt. We expect the spot coal price in China to average atRmb650/t, on the back of tightened supply in a stable demand environment.Nevertheless, a lower oil price would lead to lower prices for coal chemicals andaffect Chinacoal’s earnings negatively.

Valuation: We revise down our net profit estimates by 10.7% for 2019E and 15.9%for 2020E to reflect lower chemical segment profit contribution because of lowerPP/PE and methanol prices assumptions; we also introduce our 2021E. We maintain ourBuy rating on Chinacoal-H, with a revised 12-month price target of HK$4.6 (fromHK$5.1), and our Neutral rating on Chinacoal-A, with a revised 12-month price target ofRmb5.4 (from Rmb6.0). Our price target methodology is based on historical P/B vs. ROEcorrelation – or 2020E P/B of 0.5X/0.7X at an ROE of 5.1% (from 0.6X/0.8X at an ROE of5.9%).

Key risks – upside: 1) higher coal prices, mainly driven by tighter supply in the Chinesemarket; 2) the Chinese government putting further limits on imported coal; downside: 1)lower coal prices, the government releasing new coal capacity; 2) additional unexpectedcosts imposed on coal producers by the government, especially relating toenvironmental and resource issues; and 3) a delay in approval for Chinacoal’s newmines.