Shanxi Guoyang New Energy:In line with expectations; Lacks near-term catalysts

Guoyang announced FY2010/1Q11 revenue of Rmb27.9bn/Rmb12.3bn (up39.7%/84.4% yoy) and net profit of Rmb2.41bn/Rmb0.66bn, with 2010 EPSof Rmb1.0 (consistent with the company’s yoy guidance and ourestimates) and 1Q11 EPS of Rmb0.27 (vs. Bloomberg consensus ofRmb0.32). We believe the revenue growth mainly came from yoy increasein coal production and rising coal prices.

Highlights: (1) Self-produced coal reached 26.2mn tonnes in 2010, up25% yoy, which we attribute to the extension of the Xinjing and Pingshumines; (2) Financial cost rose 118% yoy (to Rmb198mn) in 2010, reflectinginterest expense from bonds that were only counted for 3 months in 2009;(3) Minority interest was Rmb82mn in 2010, up 523% yoy, as net incomeincreased from jointly controlled entities; Looking ahead, we slightlyraise our self-produced coal estimate to 27.2mn tonnes (up 1% vs. ourprevious estimate of 26.9mn tonnes) in 2011, as the extension progress ofXinjing and Pingshu mines were better than our expectations (0.4mntonnes above our estimate in 2010).

What to do with the stock。

We raise our 2011E-2013E EPS by 4.3%/3.5%/4.0% to Rmb1.16/1.38/1.52,reflecting our higher coal production estimates. The stock is trading at22.2X 2011E P/E, still higher than the sector’s current average of 20.6X. Wecontinue to see uncertainty over potential asset injections (as it wouldneed to be coordinated with Cinda, which holds a 40.42% stake in theparent company). We maintain our Neutral rating on Guoyang and our12m Director’s Cut-based target price of Rmb28.13. Upside risk: Fasterthan-expected asset injections. Downside risk: Coal price declines.