Sector News Flash:
Coal Mining
Noises Create Opportunity To Accumulate
Coal Mining
Noises Create Opportunity To Accumulate
The coal mining
counters’ share prices were hammered last week. This was mostly on the NDRC’s
statement that China may not undertake significant measures on coal production,
and leave the size and timing of FY17 coal production capacity cuts to local
governments – as long as coal prices are in the green level. We think coal
prices in this level should keep coal firms under our coverage booking FY17
earnings growth. We think the noises create opportunity to accumulate good coal
mining counters. Our Top Pick is Bukit Asam. In the small-cap category, we like
Harum.
No
significant measures on China’s coal production. The share prices of
coal counters were hammered last week. This was mainly due to China’s National
Development and Reform Commission’s (NDRC) statement that there should no
significant cutting measures in coal production capacity in FY17, as long as
coal price were still at the green level (see explanation below). The NDRC is
also adopting more market-friendly measures in coal mining to avoid upward
spikes in coal prices. However, the commission still plans to cut another 150m
tonnes of coal production capacity in FY17 (FY16: 290m tonnes).
China
has an interest in maintaining coal price at a reasonable range that generates
profits for its coal miners. As the biggest coal consumer and coal
producer, China has an interest in maintaining coal prices at a reasonable
range that generates profits for local coal miners. This is in order for the
latter to service their loans to Chinese banks. In 2015, total loans to Chinese
mining companies stood at ~CNY1.9trn. China’s reasonable range, ie the green
level, of coal prices (5,500 kilocalories (kcal)/kg) is between
CNY500-570/tonne. This is equivalent to Newcastle coal price (6,000kcal/kg) of
USD64-74/tonne.
China’s
total monthly coal imports moderated in February – figures still increased by
30.6% YoY. China
booked monthly coal imports of 17.7m tonnes (+30.6% YoY, -29% MoM). We think
the moderating Chinese coal imports in February were partly due to the shorter
days in that month and China’s ban on imported coal from North Korea. This has
been valid since mid-February.
Total
coal inventory in China's state- and local-owned enterprises decreased by 14.9%
YoY to 99.9m tonnes. Total
coal inventory in China’s state- and local-owned enterprises (Figure 6)
decreased further. Inventory levels at the start of March dropped to 99.9m
tonnes (-14.9% YoY). During this period, China’s average inventory days at such
entities decreased to 16.5 days (Figure 7). These factors should lead to higher
coal imports in coming months to replenish the country’s coal inventory.
Opportunity
to accumulate good coal counters. We think recent decrease in coal counters’
share prices should create opportunity to accumulate the coal counters. This is
as we think China would maintain coal prices at reasonable levels, ie the green
level. We use an average FY17F coal price of USD73/tonne. Based on our sensitivity
analysis on coal counters under our coverage, every 10% change in coal price
from our base case price results in EPS changing by ~16-19% (Figures 8, 9 and
10). Tambang Batubara
Bukit Asam Persero (Bukit Asam) is our Top Pick. We like Bukit Asam because
it has more earnings visibility. This is because it is the only coal mining
counter that would benefit from the synergy between stateowned enterprises
(SOEs). This is as its coal sales volume to other SOEs keeps increasing. It
also has long-term coal domestic commitments to other SOEs. In small cap
category, we like Harum Energy (Harum). We think Harum’s FY17 earnings should
grow significantly (+185%). This has not been factored in by consensus. Key
risks to our calls include a significant drop in coal prices and
weaker-than-expected coal demand.Kindly click the following link for the full report: Noises Create Opportunity To Accumulate
Best regards,
Hariyanto Wijaya,
CFA, CFP, CA, CPA
Vice President
Research Analyst – Heavy
Equipment, Coal, Plantation
PT. RHB Securities
Indonesia
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