SinoCoking Coal (SCOK)
posted by The Traveller on Saturday, February 13, 2010

SCOK Valuation based on presentation filed last night (February 12):

FY 2010 (June 30, 2010) Net Income Guidance: $19.311 million
Diluted Share Count (Feb 5, 2010): 15,352,240
Implied 2010 EPS: $1.26
Current P/E (PPS $6.80): 5.4

- net income pretty much flat for the past 2 years
- margins declining

Maybe it's just me but all the photos of the facilities in that presentation make it look like an industrial ruin. SCOK operates their own coal mine, a coal washing facility, a coal trading business and a coking facility. Without the planned new coking facility there is very limited room for future growth.

SCOK plans construction of a new coking facility that would increase current capacity by factor 4.

"Plans to complete construction and start production by the first calendar quarter of 2011, assuming sufficient capital for construction (approximately $65 million in incremental capital) available by March 2010"

- adjusted cash about $8 million (incl. recent private placement)
- SinoCoking has received approval for a project loan in the amount of RMB 300 million ($USD 44 million)

Looks like the company is on track to start construction of the new coking facility this spring, another round of equity financing seems likely in 2010, though.

Projections of the company are based on a very optimistic scenario for steel demand in the next five years. Here are some articles on the subject of coking coal prices and steel over-capacity:

China Steelmakers Compete For Import Of Coking Coal (Mining Exploration News)
BHP Seeks Quarterly Revision of Coking Coal Prices (Reuters)

China Has More Idle Steel Capacity Than Japanese And Korean Production Combined (Business Insider)
China Baosteel’s Profit Falls in 2009 (Talksteel.com)

So.. bottom line is that betting on 10% annual growth for steel demand and accordingly rising prices for coking coal seems more risky than serving the power generation industry with thermal coal. The pricing situation could change dramatically until Q1/2011 and not just for a tighter lending environment. China's largest steelmaker Baoshan Iron & Steel already stepped back from a planned price increase for February.

And to compare SCOK with its peers:
Ticker    PPS   FY10e EPS   FY10e P/E
-------------------------------------
SCOK $6.80 $1.26 5.40
LLEN $6.85 $1.20 5.71
SGZH $8.05 $1.80 4.47
PUDA $4.90 $1.45 3.38
LLEN uplists to NasdaqGM on Feb 18
PUDA estimates might be too optimistic (under revision)


With limited growth prospects for the next 12 months and a substantially more risky business plan, I believe SCOK will likely underperform its peers this year. My favourite in the group is LLEN.

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