There are several reasons: 1. Macroeconomic recovery, PMI has been above 50 for three consecutive months, and the market is beginning to expect profits in the cyclical sector to rebound. 2. At the industry level, although coal prices have not risen significantly, downstream steel prices, especially iron ore prices, have clearly risen, and the market is beginning to have strong expectations for coking coal price increases. 3. At the trading level, the Hong Kong market has continued to be strong and has repeatedly reached new highs recently, and the market is shorting individual stocks that have lagged behind in gains over the past three months.
Mine disasters are frequent, and fundamentals have worsened: we think that the current stock price has broken away quite a bit from the company's fundamentals. On December 5, 2012, a gas explosion occurred at the Shangchang coal mine in Fuyuan County, Yunnan Province, killing 17 people. Based on past experience, the local coal mine in Fuyuan County will stop production for at least a month for rectification. Considering that the Spring Festival is approaching, we expect that the shutdown period will probably continue until March. The coal production of Hengding's coal mine in Fuyuan County accounts for about 25-30% of the company's total output.
Consistent expectations are too high, and the profit warning may be a catalyst for the company's stock price decline: coal prices in the region where the company is located have not seen a significant improvement recently, and the tax-inclusive price of coking coal in Liupanshui remains at 1,260 yuan/ton. We lowered the company's raw coal production forecast for 2012, from 3.8 million tons to 3.6 million tons; the average price of refined coal was lowered from 1,130 yuan/ton to 1,100 yuan/ton. The production forecast for 2013 was lowered from 5.2 million tons to 4.5 million tons. The price forecast was lowered from 1,100 yuan/ton to 1,050 yuan/ton. The 2012/2013 EPS was lowered from 0.15 yuan/0.36 yuan to -0.01 yuan/0.17 yuan. Since the company's performance will decline drastically in 2012, it is likely that a profit warning will be announced in the near future.
Downgraded the rating to a “reduced holdings” rating: We think that as the company gradually publishes financial and operating data, the market will soon clear up from excessive excitement. Currently, the price-earnings ratio corresponding to 2013 of the company's stock price is 12.3 times, which is already higher than that of industry leaders Shenhua and China Coal. However, we believe that the company's fundamentals have not escaped its predicament. After comprehensively considering all factors, the company's rating was downgraded to “holdings reduction”. The reasonable value range is 1.60-1.80 Hong Kong dollars, and there is room for decline of about 30%.
The main risk comes from coking coal prices rising more than expected.