Datong Coal Industry:2010 earnings above expectations but 1Q11 below on higher costs

Datong announced FY2010/1Q11 revenue of Rmb10.5bn/Rmb2.7bn(+10.1%/+8.8% yoy) and net profit of Rmb1.29bn/Rmb0.28bn, with 2010EPS of Rmb0.77 (13% above Wind consensus of Rmb0.68 and our estimateof Rmb0.67) and 1Q11 EPS of Rmb0.16 (vs. Wind consensus of Rmb0.21).

We believe the revenue growth mainly came from the yoy increase in coalproduction and rising coal prices.

Highlights: (1) Realized ASP was Rmb457/t in 2010, up 6% yoy and 3.2%higher than our estimate of Rmb443/t, which we attribute to the higherspot sales percentage in 2010; (2) Gross margin was down 3.3% yoy to45.5% in 1Q11, which we attribute to higher costs in 1Q11; (3) Minorityinterest was Rmb218mn in 1Q11, up 21% yoy, as net income increasedfrom jointly controlled entities. Looking ahead, we slightly raise our unitcost estimate for coal to Rmb264/t (up 7.7% yoy and 8.9% vs. our previousestimate of Rmb243/t) in 2011, as costs in 1Q11 were above our estimates;We also remove our estimates on coal production for Zhaofu and Huafuafter the company announced it withdrew its equity investments fromthese two mines on March 24, 2011.

What to do with the stock。

We lower our 2011E-2013E EPS by 6.3%/8.9%/4.0% to Rmb0.89/Rmb1.01/Rmb1.03, reflecting our higher coal cost estimates and coal productionadjustments. The stock is trading at 21.8X 2011E P/E, higher than thesector’s current average of 20.3X. We maintain our Neutral rating onDatong and our 12-m Director’s Cut-based target price of Rmb20.36.

Upside risk: Faster-than-expected asset injections. Downside risk: Coalprice declines.