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1、8 March 2018Metals Buy on upcoming weaknessUpgrading coal price forecasts; Shenhua remains top pick Lower capex has reduced potential output growth in the coal sector, reinforcing our expectations for a tight supply/demand balance in the sector and prompting further increases in our QHD price estima
2、tes and earnings forecasts. At the same time, demand is becoming more seasonal, as heavy industry consumes a smaller share of power output, which is increasing the volatility of coal prices. We expectequity prices to reflect that and potentially deepen the current correction ahead of the low-demand
3、spring period, creating an ideal opportunity to raise positions in the sector. China Shenhua has the best balance of valuation (40%+ upside potential to our target price), balance sheet, FCF attractions and is our top pick, but Yanzhou has greater leverage to the spot price. We are re-instating with
4、 a Buy rating.Coal demand/supply to remain tight into 2018/2019 Investment in coal contracted by 12.3% last year, which will constrain output growth over the next 12-18 months. Therefore, we see Chinese coal supply growth of just 1.3% this year. A similar trend can be seen in Indonesia and Australia
5、 due to the limited appetite of banks to extend credit to miners. Even with demand rising by only 1.0-1.5%, the tight balance indicates higher coal prices, and we increase our QHD coal price forecasts by 5% and 4% for this year and next year to RMB630/t and RMB600/t, respectively. This leads to aver
6、age sector earnings revisions of 7-10%. Our assumptions include an uptick of capex and thus, output into late 2019, so our QHD forecasts may prove to be conservative.Nevertheless, coal price volatility should intensify Residential and commercial power usage accounts for 27.8% of Chinas powerconsumpt
7、ion, up significantly from 21% in 2007. Its demand for electricity is far more seasonal than industrial users, and swings in demand have become more pronounced, which in turn has increased coal price volatility through out the year. The increased need for transported coal to replace the mining capac
8、ity shut down in the Southern provinces has also increased price volatility because of constraints on rail capacity, especially in winter. Therefore, our view is that the spot price may surprise to the downside in the near term. Thus, timing entry points in the sector are more sensitive, but stocks
9、have already corrected by 20-30% ahead ofthis dip, as well as valuations of 6-8x PEx and generally below book value offer returns of 40% on a 12-month outlook.James KanResearch Analyst+852-2203 6146Key Changes CompanyTarget PriceRating1088.HK28.50 to 30.50-1898.HK5.35 to 5.20-0639.HK2.40 to 3.00-Sou
10、rce: Deutsche BankTop picksChina Shenhua Energy (1088.HK),HKD21.70BuyYanzhou Coal (1171.HK),HKD11.22BuySource: Deutsche BankCompanies featuredChina Shenhua Energy (1088.HK),HKD21.70Buy2016A 2017E 2018EP/E (x)9.56.97.1EV/EBITDA (x)4.74.44.3Price/book (x)0.81.11.1Yanzhou Coal (1171.HK),HKD11.22Buy2016
11、A 2017E 2018EP/E (x)11.76.95.4EV/EBITDA (x)6.97.76.0Price/book (x)0.61.00.9China Coal Energy (1898.HK),HKD3.68Buy2016A 2017E 2018EP/E (x)23.98.98.2EV/EBITDA (x)8.85.85.5Price/book (x)0.50.40.4Shougang Fushan (0639.HK),HKD2.31Buy2016A 2017E 2018EP/E (x)62.39.210.1EV/EBITDA (x)9.03.73.7Price/book (x)0
12、.60.80.8Source: Deutsche BankDeutsche Bank AG/Hong KongDeutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should beaware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider
13、this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 083/04/2017. The Content may not be distributed in The Peoples Republic of China (The PRC) (except in compliance with the applicable laws and regulations
14、 of PRC), excluding special administrative regions of Hong Kong and Macau.).Distributed on: 07/03/2018 20:15:13 GMT7T2se3r0Ot6kwoPa8 March 2018Metals major risk: significant macro slowdown The detailed summary of our coal price upgrades and earnings upgrades are in Figure 2, Figure 6 and Figure 13 i
15、n the report. We continue to use PB/ROE methodology for setting target prices for Shenhua, China Coal, and Yanzhou. For Shenhua, with a target multiple at 1.5x 2018 PB, the target price is set at HK $30.5 (13% upgrade and 45% upside potential, including cash dividend yield). With its 15% ROE, 15-20%
16、 FCF yield and stable operations, we currently believe 1x PB is attractive. Yanzhou/China Coals target PB multiples are set at 1.2x/0.6x, according to historical PB/ROE dynamics. The target prices of Yanzhou and China Coal are set at HK$15.6 (41% upside potential) and HK$5.2 (44% upside potential), respectively. For Fushan, we adjust its life-of-mine DCF-based target price to HK$3 (40% upside potential, including yield). A significant slowdown of the China macro will be a major risk to our
