China Coal Stocks Round-up
posted by The Traveller on Saturday, July 17, 2010

China Energy Corporation (CHGY) is currently trading at $1.98, up 141.46% for the year and down 51.95% from its April 9 high at $4.12. The Trading China Tracker Score is 12 (Strong Buy).

CHGY filed their quarterly report last week with revenues and earnings pretty much flat from the first quarter. That was not very impressive as their first quarter is usually the slowest of the year and China Energy's coal business is closed for about two weeks over the Chinese New Year holiday. Coal revenues were higher by almost 1000% over the year due to the fact that their coal mine was partially closed in 2009. However, China Energy is well on track to reach their net income guidance of $17 million to $18 million for 2010, which translates into earnings per share of about $0.40 and a current P/E ratio of 5. The company has no analyst coverage at this point.

As of May 31, China Energy had a working capital deficit of about $18.7 million, but the company does expect to generate sufficient cash flow for their working capital needs. I would expect the company to get approval for listing their stock on Nyse Amex later this year, however it might be advised to bring down their high share count via reverse split and try to get listed on Nasdaq. There is no indication from the company that they were planning a reverse split, though.

On valuation I believe we should not expect multiples higher than 7 or 8 at this stage. My 12-month price target would be $3.00 based on 7.5x 2010e EPS of $0.40.

L&L Energy (LLEN) is currently trading at $9.61, up 48.99% for the year and down 35.55% from its April 7 high at $14.91. The Trading China Tracker Score is 8 (Buy).

L&L Energy pre-announced FY 2010 numbers last week with a 10-K filing expected for Monday or Tuesday. The company announced net income of $30 million on revenues of $109 million for the year and stressed that they have beaten their own guidance. A look in the Trading China archives shows FY 2010 guidance, released on October 9, 2009, for $28.1 million net income on $108.1 million revenues - so the actual numbers were higher but only by a very small margin.

Investors should focus on FY 2011 (May 2010 to April 2011) numbers now, and LLEN projects revenue of $218 million and net income of $46 million or $1.61 per share. This represents revenue and earnings growth of 95% and 56%, respectively, and does not include the impact of potential acquisitions. Using the $1.61 from the guidance, LLEN is currently valued with a P/E ratio of 6 which leaves plenty of space for share price appreciation.

I view LLEN as the most mature of the six China coal plays covered in this article, and I believe the stock will be able to support higher multiples than its peers for the time being. Shareholder communication is good and it has the highest market capitalization of those six. As a U.S. company it is less vulnerable to "China gloom and doom" campaigns, LLEN is one of the few remaining China-based stocks in the Russell 2000, and it has a history of trading in the group of China stocks that is picked up first by momentum traders.

L&L Energy has no analyst coverage and no price targets have been issued other than the $19.50 from their IR firm Red Chip. I believe those $19.50 are achievable, although I would see a P/E multiple of 12 as the high end what is reasonable for a coal mining stock. My price target on LLEN is $16.50 based on roughly 10x FY2011e EPS of $1.61 per company guidance.

Puda Coal (PUDA) is currently trading at $7.35, unchanged for the year and down 38.22% from its April 7 high at $11.90. The Trading China Tracker Score is 16 (Strong Buy).

Back in May, Puda Coal reported very strong numbers for the first quarter and confirmed that gross margins should remain strong throughout the rest of the year. The company is in the process of consolidating several coal mines and back in May management said it expects to receive the business licenses for the Pinglu and Jianhe projects by the end of June. The lack of such an announcement might indicate a delay or just PUDA's failure to disclose this information. In case of a delay it might turn out as a major negative for PUDA as local government decisions are widely unpredictable. So there is some caution advised with the EPS numbers that are floating around.

Brean Murray is covering PUDA and currently rates the stock a BUY with a $18 price target. The analyst's estimates call for 2010 EPS of $1.17 rising to $2.31 in 2011. Puda management said that a recent announcement by the China National Development and Reform Commission (NDRC) to curb price hikes in thermal coal would not have a major impact on the company's results. However, with the NDRC action and the uncertain path for consolidating those coal mines, I would like to reduce Brean Murray's estimates by 15% just to be on the safe side here.

My price target for the stock is $15.50 based on roughly 8x 2011e EPS of $1.95. I believe PUDA should be valued with slightly lower multiples than LLEN for higher execution risk, less consideration of shareholder interests in the past (past financings) and also a higher risk of further dilution in the months ahead. However, PUDA should have the highest upside from current levels in the China coal stocks group.

Sino Clean Energy (SCEI) is currently trading at $5.52, up 8.23% for the year and down 40% from its March 31 high at $9.20. The Trading China Tracker Score is 17 (Strong Buy).

SCEI (formerly SCLX on the OTC/BB) also reported very strong first quarter numbers with revenue and net income up 215% and 246% year over year. The company also guided full year 2010 numbers to be 128% higher than 2009. That is truly impressive growth with the additional benefit of excellent gross margins of 41.2%, up 10% from the year ago period.

What's holding the stock back is the $35 million S-1 filing from June, which was posted just a few days after the Nasdaq listing became effective. The company should be able to raise funds at $5 per share, so the secondary offering would have a size of 7 million shares which would mean about 40% dilution of Sino Clean's current shareholders.

For my estimates I will just assume the SPO goes through at $5. Back in May SCEI said it expects at least $105 million in revenues and adjusted net income of at least $25 million for FY2010. My EPS estimate for the year, including those 7 million new shares, stands at $1.15 which leads to a current P/E ratio of 4.8. For my price target of $8.75 I use the CHGY multiple of 7.5 as both companies are similar in size and market position. However, I would prefer SCEI over CHGY as soon as the secondary offering is out of the way.

SinoCoking Coal (SCOK) is currently trading at $13.28, down 9.05% for the year and down 75.28% from its March 5 high at $53.70 (no typo). The Trading China Tracker Score is -9 (Strong Sell).

This is by far the most speculative of the six coal stocks mentioned here. SinoCoking is currently constructing a new coking facility which should triple the company's current capacity and expand gross margins. The company also got government permission to acquire and consolidate other coal mines and has already identified 22(!) potential targets. All those projects will require enormous funds and it is very unclear when and if SCOK will be able to successfully raise such funds, and at what terms.

Another risk factor here is that the future pricing of coking coal is significantly less certain than that of thermal coal as the Chinese steel industry is currently under severe pressure and a good part of SinoCoking's projected growth will depend on the recovery of their major customer's businesses. And if that's not enough... SCOK stock is the most expensive off all six coal stocks with a current 2010e P/E of 10.5.

Rodman & Renshaw initiated coverage on SCOK yesterday with a NEUTRAL rating, calling the stock fully valued at the current time. I believe that is a very optimistic view as all those risks have to be taken into account. I wouldn't touch the stock as an investment at any price higher than $5, based on the fact that significant shareholder dilution has to be expected in the next 12 months and meaningful earnings contribution of the new coking plant is at least one year away.

Songzai International (SGZH) is currently trading at $5.00, down 38.35% for the year and down 55.56% from its March 8 high at $11.25. The Trading China Tracker Score is 0 (Sell).

Songzai - which plans to change its name to "U.S. China Mining Group" this month - is the laggard in the otherwise thriving China coal sector this year. Huge problems at their coal mine led to a year-over-year decrease in revenues of 40% and net income has collapsed by almost 80%. The company said that the current second quarter will be another "quarter of continued pressure" but it expects operations in the affected Xing An mine to return to normal in the third quarter of 2010.

SGZH has acquired a second coal mine this spring with resources of approximately 143 million metric tons. The company said that beginning operation in the third quarter of 2010 will deliver meaningful revenues from the new mine this year and upwards of $50 million in revenues during its first full year of operation in 2011.

There have been many bad surprises for SGZH shareholders in the past year which leads me to take a very cautious stance with all company announcements regarding future revenues and earnings. However, it looks like SGZH might be able to turn around its business in the second half of this year and 2011 projections should look much better. At this time it is not possible for me to come up with reliable FY2011 estimates or a price target, although I would not sell the stock at current levels.

With Second Quarter earnings in August we should hopefully get confirmation that the business will be back on track soon, and if the company wants their share price to recover they better release some numbers for the combined two mines that investors can work with. SGZH might become a strong buy after the next report with the Xing An mine back to normalized production, and the contribution of the new Liujiaqu mine setting the stage for triple digit growth in 2011.

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At August 06, 2010 1:59 pm , Anonymous Anonymous said...

Good review for Sino Clean Energy. However, I should point out that contained in S-1 filing document for the $35 million secondary public offering are: a. a projected 1.8 million ton production for 2010, up from 1.05 million ton announced several months ago, and b. an expansion into two other provinces (from memory -- two southern provinces) beside organic growth.

Dilution in new shares issued for funds raised should be looked at together with new growth. In this case, the projected growth to 1.8 million ton of production is about 70 percent higher than the estimated 1.05 ton of production announced several months ago. Impressive growth in the last 12 months and I believe, more growth to come. Therefore, the projected growth in production (and demand)(70%) outweighs the dilution of shares (42%)


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