China Pulse Check: Coal Sector

Transcription

1 Equity Research China Pulse Check China Pulse Check: Coal Sector Thermal coal price stabilized, eyes on maintenance of the Daqin line and winter restocking Ou Yafei SFC CE No. BFN GF Securities (Hong Kong) Brokerage Limited 29-3/F, Li Po Chun Chambers 189 Des Voeux Road Central Hong Kong Contribution from the GF A-share research team: Shen Tao * shentao@gf.com.cn * Please note that Shen Tao is not a registered licensee with the Securities and Futures Commission of Hong Kong and is not allowed to conduct regulated activities in Hong Kong. Coal sector outperformed the market in Sep, maintenance of Daqin line and winter restocking ahead in Oct The SHCOMP rose 3.5% in Sep on a recovery in macro sentiment. The coal sector outperformed the SHCOMP and CSI3 by 1.7% and 2.1% respectively during the month, mainly due to a re-rating from catalysts such as the share buyback of Shaanxi Coal. In Oct, we suggest watching fundamentals: 1) On the demand side, thermal coal demand will be driven higher by winter restocking. With market expectations of environmental policy-driven production restrictions, we think downstream capacity utilization is likely to rebound, underpinning coking coal demand. 2) On the supply side, against the backdrop of production safety checks and recent maintenance of the Daqin line, we do not expect much incremental supply growth in Oct. Raw coal output was up 4.2% YoY in Aug. We believe environmental protection measures will continue for some time and have an ongoing effect. Further, according to the Taiyuan Railway Bureau, Daqin line maintenance will last from September 29 to October 23, meaning little incremental supply in Oct. In terms of imported coal, 8M18 coal imports reached 24m tonnes, up 14.6% YoY. Recently, the NDRC once again stressed strict control of imports, which is likely to result in the tightening of import quotas, but we expect imported coal to face limited pressure during Oct. Sector review: Thermal coal prices at ports up YoY in Sep; imported volume down MoM in Aug The latest FOB price for 5,5kcal/kg thermal coal at Qinhuangdao port reached Rmb644/tonne on Oct 8, 218, up 3.5% compared with end-aug. The coking coal price at Jingtang port remained flat from the end of the previous month. In mining regions, prices of thermal and coking coal have improved, while some types of anthracite remained flat. China s coal imports rose 13.5% YoY in Aug, but were down 1.1% MoM. Oct outlook: Thermal coal and anthracite prices to stabilize, coking coal to remain flat to relatively higher Sector view: Demand stabilizing while tightening, sector undervalued We expect thermal coal prices to stabilize, based on: upcoming winter restocking which should underpin demand, the import quota tightening and output growth being limited. In terms of coking coal, demand has improved in the peak season and we notice a low inventory level. Given this and the fact that overseas coal prices have also rebounded rapidly, we expect coking coal prices to remain solid in the near-term. The PBoC recently cut the RRR to support economic stabilization, which should help to maintain steady growth in downstream demand. Coal supply and demand growth in the short-term and medium-term are set to increase slightly, and coal prices should remain at a medium-high level, in our view. Average coal prices at ports and coal mining regions have improved noticeably YoY. We expect the 218 average coal price to be up slightly compared with 217. Sector profit was Rmb28.17bn in August, up 16.6% YoY. In the medium and long term, we believe most players earnings will remain relatively stable, even in our bear-case scenario in which the coal price drops to about Rmb57/tonne. Given a rising dividend payout ratio at key coal companies amid declining capex, we believe valuations will gradually recover along with improving sentiment. We prefer undervalued names including Shaanxi Coal Industry (61225 CH), Shenhua Energy (6188 CH). We also like Yanzhou Coal Mining (6188 CH), Lu'an Environmental Energy Development (61699 CH), Shanxi Coking (674 CH) and coke leaders benefiting from tightening environmental regulations. Risks Economic growth comes in lower than expected; demand declines more significantly than expected; supply-side reform falling short of expectations; greater-thanexpected coal price drops. This is a summary of a report originally written in Chinese. Please contact us for more information of the original report. The Chinese version shall prevail in the event of any discrepancy between the two versions.

2 Key data point snapshots Figure 1: QHD port 5,5kcal/kg thermal coal FOB price at Rmb639/tonne as of Sep 3, up 2.7% from end-aug (Rmb/tonne) Figure 2: Guizhou Shuicheng refined coking coal price up Rmb2/tonne in Sep (Rmb/tonne) Figure 3: Anthracite prices remained flat in Sep (Rmb/tonne) 2 Henan Pingdingshan coking coal Anhui Huaibei refined coking coal Guizhou Shuicheng refined coking coal Sichuan Panzhihua refined coking coal 19 Jincheng anthracite lump Henan Yongcheng anthracite lump Yangquan anthracite lump Guizhou Zunyi anthracite lump

3 Figure 4: As of Sep, RB Index up 4.15% MoM, ARA up 1.57% MoM, NEWC down 4.34% MoM (US$/tonne) RB DES ARA NewCastle Figure 5: FOB price of premium hard coking coal at Hay Point Port was US$24/tonne as of Sep 28 (US$/tonne) Figure 6: Price advantage of imported coal widened in July Price advantage of imported coal

4 Figure 7: 8M18 China thermal power generation up 7.2% YoY YoY Cumulative YoY (1) (2) Figure 8: 8M18 China crude steel output up 5.8% YoY (1k tonnes) YoY Cumulative YoY Figure 9: 8M18 China cement output up.5% YoY YoY Cumulative YoY (1) (2) (3) 4

5 Figure 1: Coal inventory at 6 key power plants was 14.71m tonnes on Sep 3, down by.49m tonnes compared to end-aug (1k tonnes)

6 Rating definitions Benchmark: Hong Kong Hang Seng Index Time horizon: 12 months Company ratings Buy Stock expected to outperform benchmark by more than 15% Accumulate Stock expected to outperform benchmark by more than 5% but not more than 15% Hold Expected stock relative performance ranges between -5% and 5% Underperform Stock expected to underperform benchmark by more than 5% Sector ratings Positive Sector expected to outperform benchmark by more than 1% Neutral Expected sector relative performance ranges between -1% and 1% Cautious Sector expected to underperform benchmark by more than 1% Analyst Certification The research analyst(s) primarily responsible for the content of this research report, in whole or in part, certifies that with respect to the company or relevant securities that the analyst(s) covered in this report: (1) all of the views expressed accurately reflect his or her personal views on the company or relevant securities mentioned herein; and (2) no part of his or her remuneration was, is, or will be, directly or indirectly, in connection with his or her specific recommendations or views expressed in this research report. Disclosure of Interests (1) The proprietary trading division of GF Securities (Hong Kong) Brokerage Limited ( GF Securities (Hong Kong) ) and/or its affiliated or associated companies do not hold any shares of the securities mentioned in this research report. (2) GF Securities (Hong Kong) and/or its affiliated or associated companies have compensation or mandate for investment banking services received within the preceding 12 months from China Shenhua Energy Co. Ltd. (Stock Code: 6188) contained in this research report. (3) Neither the analyst(s) preparing this report nor his/her associate(s) serves as an officer of the company mentioned in this report and has any financial interests or hold any shares of the securities mentioned in this report. Disclaimer This report is prepared by GF Securities (Hong Kong). 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