China Coal(1898.HK):Coal bad,chemicals good

Retain SELL with outlook for more losses

China Coal’s 1H15 net loss was below our forecast, but Ebitda was ~30%above our estimate. The coal segment lagged our expectations, with bothprices and costs disappointing. This was more than offset by performanceof the coal–chemicals segment as margins jumped 26ppt YoY. We raise15CL Ebitda, but lower our outer year forecasts. We maintain ourHK$3.20 target price and SELL rating. Valuations are expensive, thebalance sheet is stretched and we forecast more losses ahead.

Results in a nutshell

China Coal reported a 1H15 net loss of Rmb1.07bn, inline with guidance of anRmb0.8-1.2bn loss. Ebitda fell 20% YoY to Rmb3.08bn, but was 32% aboveour forecast with the Ebitda margin down 0.6ppt YoY to 13.7%. Ebit fell 74%YoY to Rmb0.60bn, but was 41% ahead of our forecast. Finance costs werehigher than we forecast, while minorities were a larger credit to the net loss.

Net debt still rising

Net operating cashflow fell 32% YoY to Rmb0.36bn, while we estimate capexdeclined by 37% YoY to Rmb6.78bn. This contributed to net debt rising 13%HoH to Rmb77.03bn (US$12.0bn), which is almost double the market cap (Hshare basis). Debt metrics continue to deteriorate, with net gearing up 9pptHoH to 76%, net debt/Ebitda 9.4x, and an interest coverage ratio of 0.3x.

Coal bad, chemical better

The coal segment Ebit fell 130% YoY to a loss of Rmb0.72bn, which wasworse than our forecast as the average coal selling price/unit costs were 5%lower/2% higher than our estimate. This was more than offset by the coalchemicalssegment, where Ebit of Rmb1.41bn was significantly higher thanour forecast. The segment margin expanded by 25.8ppt YoY to 23% as theTuke fertiliser and Yulin plastics project ramped up.

Coal segment, debt drag

We raise margins on the coal-chemicals segment on lower unit COGS, butdecrease margins in the coal segment on lower price realisations. Thiscontributes to a 4% increase/4% decrease in 15CL/16CL Ebitda. Our targetprice, based on 0.4x 16CL PB, remains HK$3.20. We adjust our methodology,and set our target at a 20% discount to one standard deviation belowhistorical average BV. We expect the stock to trade at the bottom end of itshistorical PB range or make new lows while the outlook remains for losses.