China Coal:Interest cost burden

Downgrade to SELL after 40% price rally.

China Coal’s 2015 Ebitda was ahead of our forecast on strong coal pricerealisations, but earnings missed on finance costs and minorities. Thecompany is showing supply discipline by cutting coal production, but thestretched balance sheet means that operating cashflow is consumed indebt servicing, and we expect the company to remain loss-making overthe forecast period. Our PB-based target price is unchanged at HK$2.80,but we downgrade the stock from U-PF to SELL after its 40% rally.

Results in a nutshell.

China Coal’s 2015 net loss of Rmb3.3bn was 25% greater than our forecast.

Ebitda was 15% ahead of our estimate on higher coal price realisations, butthe bottom line was hurt by higher finance costs and minority interest. Thecoal segment was Ebit loss-making but better than our forecasts, while thechemicals segment contributed over 90% of group Ebit, but lagged ourforecasts with margin contraction in 2H15 on lower prices.

Cash consumed in debt servicing.

The company reported operating cash inflow up 73% YoY to Rmb7.3bn, whichwe believe is before gross finance costs of Rmb6.4bn. Capex was notdisclosed, but net debt increased by Rmb12.1bn or 18% YoY to Rmb80.8bn,which is 2% below our forecast. Credit fundamentals are poor, with netgearing up 14ppt YoY to 81%, net debt/2015 Ebitda of 11x, and interestcoverage almost zero. We estimate that net finance costs will consume aboutthree quarters of gross operating cash inflow in 16-17CL.

Showing supply discipline.

China Coal’s 2016 coal production is guided down ~15% YoY to 80mt. This islower than our expectation, and likely reflects the government directive toreduce working days. This guidance is likely conservative (production rate in2M16 is 81mtpa), but we believe there is read-through for peer Shenhua. Ithas positive implications for the coal prices and potentially imports, but wewould expect supply discipline to wane when prices stage a modest recovery.

Downgrade to SELL after rally.

We raise 16-17CL Ebitda by 29-32% on higher coal price realisations, but weexpect the stock to be loss-making over the forecast period. Our target price,based on 0.4x PB, is unchanged at HK$2.80. The stock has risen over 40%from its lows despite negative earnings momentum in 1H16. With 16%implied downside, we downgrade our rating from U-PF to SELL.