Surging Coal Prices Drove Positive 2016 Profit Alerts for Coal Companies

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Equity Bottom-Up

China Coal Energy Co H / Equity Bottom-Up

China Coal’s preliminary profit of CNY 350-520 million in the first half was no surprise, as the asset sales of four subsidiaries in the second quarter is likely to result in a one-off disposal gain of more than CNY 800 million, which suggests the company’s core operation is still loss-making.While the average coal price has rebounded about 10% since beginning of the year, we’ve yet to turn positive on the prospects for coal producers, as serious oversupply remains, and the downstream coal demand is still weak, which is reflected in flat industrial power consumption in the first half.We maintain both our no-moat rating and fair value estimate of HKD 2.00 per share, and we think the shares are overvalued currently given our outlook for continued losses and potential risks from China Coal’s stretched balance sheet.Analyst: Jennifer Song &amp; Lorraine Tan

China Coal’s preliminary profit of CNY 350-520 million in the first half was no surprise, as the asset sales of four subsidiaries in the second quarter is likely to result in a one-off disposal gain of more than CNY 800 million, which suggests the company’s core operation is still loss-making.While the average coal price has rebounded about 10% since beginning of the year, we’ve yet to turn positive on the prospects for coal producers, as serious oversupply remains, and the downstream coal demand is still weak, which is reflected in flat industrial power consumption in the first half.We maintain both our no-moat rating and fair value estimate of HKD 2.00 per share, and we think the shares are overvalued currently given our outlook for continued losses and potential risks from China Coal’s stretched balance sheet.Analyst: Jennifer Song &amp; Lorraine Tan

Continued Investment in Its Noncoal Assets Is Turning Down the Power at China Coal Energy