China Pulse Check: Coal Sector

Transcription

1 Equity Research Sector Watch China Pulse Check: Coal Sector Daily coal consumption has begun to recover, seasonal peak for thermal coal down the road 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: An Peng * anpeng@gf.com.cn * Please note that An Peng 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. The coal sector outperformed the market in June, watch for a seasonal peak in thermal coal in July and a coking coal industry upcycle The SHCOMP slumped 8.% in June, whereas due to promising microeconomic data and positive expectations about an economic recovery, the coal sector index was down 2.4% during the month, outperforming the SHCOMP and CSI3 by.6pp and.3pp respectively. In July, we suggest watching fundamentals: 1) On the demand side, as July-Aug is the traditional peak season for thermal coal, demand is likely to rise further. For coking coal, as the industry is experiencing an upcycle and going through the peak season, demand should continue to recover. 2) On the supply side, with national safety checks, environmental regulations and limited growth in imported volume, we expect supply in July to be tight. Raw coal production rose 3.% YoY in May (M18 up 4% YoY). The NDRC recently issued its Notice on Ensuring the Operation of Coal, Electricity, Oil and Gas During the Summer Peak in 218, demanding an acceleration in the release of high-quality coal production capacity. However, due to environmental regulations and safety checks, we think production growth will be limited. In terms of imports, as there is strong coal demand in emerging markets, supply is restricted and the renminbi is depreciating, we expect pressure from imported coal to be limited. Sector review Thermal coal prices at ports picked up YoY in June; imported volume rose MoM in May; thermal coal prices and coking coal prices rebounded. The latest FOB price for,kcal/kg thermal coal at Qinhuangdao port reached Rmb6/tonne on June 27, 218, down.88% compared with May. The warehouse price of coking coal at Jingtang port remained flat from the end of last month. In mining areas, prices of thermal, coking coal and anthracite rebounded. China s coal imports rose.6% YoY and.2% MoM in May. July outlook: thermal coal to benefit from high prices, coking coal to remain calm with a slight increase, anthracite to bottom out Thermal coal to benefit from high prices: On the demand side, since June, daily consumption at power plants has increased by 8.2% YoY, maintaining solid growth. While for supply, due to the recent upgrade of safety checks, supply has tightened. Although the import policy has been opened up, we do not expect it to increase supply significantly. Current coal inventory at power plants remains at a normal level. Upstream container shipping stations and port inventory at transfer areas has started to decline. We expect the fall in coal prices to be limited, expecting them to continue at a high level. Coking coal to remain stable: Since April, the coking coal price in some regions has gone through an eighth round of price hikes, with cumulative growth of Rmb6/tonne. Affected by rising demand, willingness to purchase coking coal has risen. While for supply, due to recent strict environmental regulations and safety checks, production at some ore washing plants in Shanxi and Shandong has been restricted. We expect supply and demand for coking coal to stabilize, and believe the coking coal price is likely to remain calm with a slight increase. Anthracite to bottom out: The lump anthracite market is still in its low season. Affected by the environmental regulations and safety checks, production at some coal companies has been restricted, which has bolstered the lump coal market. Driven by rebounding thermal coal prices, coal slack is likely to see growth going forward. (Continued on next page ) 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 Sector view: Daily consumption at power plants has started to recover, watch for re-ratings following a recovery in expectations The overall coal price has remained flat since June. The thermal coal market will enter the summer peak in July. Coal inventory days at power plants are normal. Coal inventory in the coking coal industry chain remains at a low level. Pressure from imported coal should not be too significant. We believe the overall coal price is more likely to increase than decline. On the supply side, our estimates for the supply gap in 216 and 217 were 16m tonnes and 7 tonnes respectively, and dealer s inventory declined 11m tonnes and m tonnes. In 218-2, we expect the industry to maintain a tight balance, and the supply gap to decline to 2-4m tonnes. The liability of the coal industry was Rmb3.8trn, down just 4.8% from the high in 216. The current total assets-to-liability ratio is 66.4%, down less than 2pp in two years. The scale of debt with interest for the majority of groups did not decrease significantly, meaning the debt burden is still tough. We are therefore unlikely to see a significant drop in coal prices over the medium-to-long run. Coal company earnings are likely to increase, and re-ratings in the coal sector over the past two years have been less substantial than in the thermal power sector and in overseas market. There is substantial room for re-ratings. Coal supply and demand have been stable recently, and coal prices have stabilized at a high level. Since the beginning of the year, the average price of coal at ports and in mining areas has increased significantly compared with the same period in 217, and we expect the average price in 218 to be slightly higher than in 217. We expect liquidity and overall demand to rebound sharply in 3Q18, and coal sector valuations to increase. Our top stock picks are Shaanxi Coal Industry (6122 CH), Yanzhou Coal Mining (6188 CH), Lu'an Environmental Energy Development (61699 CH), Shanxi Coking (674 CH) and CCS Supply Chain Management (618 CH). Risks Economic growth coming in lower than expected; demand declining more significantly than expected; supply-side reform falling short of expectations; greater-than-expected coal price drops. 2

3 Key data point snapshots Figure 1: QHD port,kcal/kg thermal coal FOB price at Rmb676/tonne as of June 28, up.6% from end-may (Rmb/tonne) Figure 2: Guizhou Shuicheng refined coking coal price remained flat in June (Rmb/tonne) Henan Pingdingshan coking 河南平顶山主焦煤 coal Guizhou Shuicheng refined 贵州水城焦精煤 (G86) coking coal Anhui Huaibei refined 安徽淮北焦精煤 coking coal Sichuan Panzhihua 四川攀枝花焦精煤 refined coking coal Figure 3: Anthracite prices up Rmb1-11 in June (Rmb/tonne) Jincheng anthracite lump 晋城无烟中块 Henan Yongcheng anthracite 河南永城无烟中块 lump 阳泉无烟中块 Yangquan anthracite lump 贵州遵义无烟中块 Guizhou Zunyi anthracite lump Figure 4: As of June 28, RB Index down 4.11% MoM, ARA up.1% MoM, NEWC up 9.39% MoM (US$/tonne) RB DES ARA NewCastle

4 Figure : FOB price of premium hard coking coal at Hay Point Port was US$189/tonne as of May 31 (US$/tonne) Figure 6: Price advantage of imported coal widened in June Price advantage of 进口煤价格优势 imported coal 澳元对人民币汇率 AU$/Rmb (RHS) - 右 Figure 7: M18 China thermal power generation up 8.1% YoY 当月同比 Monthly YoY 累计同比 Cumulative YoY () (1) (1) (2) 4

5 Figure 8: M18 China crude steel output up.4% YoY (1k tonnes) 当月同比 Monthly YoY 累计同比 Cumulative YoY Figure 9: M18 China cement output down.8% YoY 当月同比 Monthly YoY 累计同比 Cumulative YoY (1) (2) (3) Figure 1: Coal inventory at 6 key power plants was 1m tonnes on June 28, increased by 2.34m tonnes compared to end-may (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 1% Accumulate Stock expected to outperform benchmark by more than % but not more than 1% Hold Expected stock relative performance ranges between -% and % Underperform Stock expected to underperform benchmark by more than % 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. 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