BOOMING CHINESE DEMAND has lit a fire under Asia-Pacific coal stocks and triggered talk of a lengthy supercycle in the region's dominant fuel. Everywhere, that is, except in China.
Glance at the performance of China Shenhua Energy's shares (ticker: 1088.Hong Kong) and it would be easy to think the Chinese economy is still in a funk, not powering ahead so fast that the central bank is tapping the brakes.
Broad Rally: Asia fired on all cylinders, with Taiwan posting the biggest gains Shares of Shenhuathe country's largest coal miner by outputhave fallen around 25% to 28.60 Hong Kong dollars (US$3.68) since the start of this year. Domestic peer China Coal Energy (1898.Hong Kong) has fared even worse, logging a near-30% decline to HK$10.12 over the same period. And both have trailed the broader Hang Seng index, which is down 6.3%.
This underperformance can be partly explained by coal's defensive qualities relative to base metals such as iron ore, up over 70% in the past year as investors sought a more direct proxy for the Chinese economic rebound. It also reflects the lack of a takeover premium attached to Chinese miners, due to hefty shareholding by the state. In contrast, Australian miners Macarthur Coal (MCC.Australia) and Centennial Coal (CEY.Australia) have jumped more than 65% in the past year, after separate multibillion-dollar overseas takeover offers.
The latest blow to Shenhua and China Coal came June 25 when the National Development and Reform Commission, China's economic planning agency, said it had asked major miners to keep coal prices stable to curb inflation during the summer, when electricity use peaks.
Investors saw the NDRC move as a de facto price cap, and Shenhua and China Coal's shares tumbled 7.3% and 11.8%, respectively, in the two trading days following the announcement. Yanzhou Coal Mining (1171.Hong Kong), China's third-largest coal miner, was even harder hit, as it has the highest exposure to the spot coal market. Its shares fell 12.9% to HK$14.78."We see increasing policy risk that the government could intervene in the coal spot market should the spot coal price continue to rise this summer," said Bank of America-Merrill Lynch, which lowered its price targets for Shenhua to HK$45 from HK$51, and China Coal to HK$16.50 from HK$19.
But there is good reason to think that market pessimism is overdone, not least because China's economic growth remains solid and will continue to spur coal consumption.
June Ng, of DBS Vickers Securities, said "the knee-jerk reaction" to the NDRC's intervention offered opportunities for long-term investors.
The U.S. government expects Chinese coal consumption to grow by a third in the decade to 2015. Given that China accounted for 47% of the world's coal use last year, a significant additional amount of coal needs to be mined. BoA-ML may have trimmed its forecast for benchmark coal prices in China next year following the NDRC's intervention, but it still expects them to rise by 10%.
DBS favors Yanzhou for its strong growth profile, predicting its net profit to grow at a compound annual rate of 26% in the 2009-2012 period as a result of its A$3.54 billion takeover of Australia's Felix Resources last December. Its target price of HK$22.70 offers 48% upside. Daiwa Securities Group agrees, noting Yanzhou's valuation is less demanding than China Coal or Shenhua. Yanzhou's one-year forward price/earnings ratio currently stands at 7.95 times.
DAVID WINNING is the Asia-Pacific energy news editor at Dow Jones Newswires in Sydney.
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