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. BFN41 oyf@gf.com.cn +86 2 8757 39 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 +86 1 5913 6693 * 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.
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) 9 8 7 6 5 4 3 218 217 216 215 214 213 212 211 1 2 3 4 5 6 7 8 9 1 11 12 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 18 16 14 14 12 9 1 8 21 211 212 213 214 215 216 217 218 4 21 211 212 213 214 215 216 217 218 2
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 16 14 12 1 8 6 4 21 211 212 213 214 215 216 217 218 Figure 5: FOB price of premium hard coking coal at Hay Point Port was US$24/tonne as of Sep 28 (US$/tonne) 35 3 25 2 15 1 5 211 212 213 214 215 216 217 218 Figure 6: Price advantage of imported coal widened in July Price advantage of imported coal 1 5 211 212 213 214 215 216 217 218-5 -1 3
Figure 7: 8M18 China thermal power generation up 7.2% YoY YoY Cumulative YoY 3 2 1 212 (1) 213 214 215 216 217 218 (2) Figure 8: 8M18 China crude steel output up 5.8% YoY (1k tonnes) YoY Cumulative YoY 15 1 5 212 213 214 215 216 217 218-5 -1 Figure 9: 8M18 China cement output up.5% YoY YoY Cumulative YoY 5 4 3 2 1 (1) 212 213 214 215 216 217 218 (2) (3) 4
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) 218 217 216 215 214 213 2 18 16 14 12 1 8 1 2 3 4 5 6 7 8 9 1 11 12 5
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