Shen Yin Wanguo released a research report that maintained its 00988-HK buy rating, while raising its target price to HK $2.16, corresponding to 12 times 2010 earnings and 1.5 times price-to-book.
The company announced that it would buy a 30% stake in Taiye Coal Mine for 700 million yuan in cash. Although the 30 per cent stake is smaller than the 49 per cent previously claimed by MOU, and the price is slightly higher (Shen Wan had expected to buy 49 per cent of the stake by 1 billion yuan).
However, Shen Wan still believes that the terms of the acquisition are still slightly better than expected because of higher profit margins and more reserves at the target mine. The reserves of the mine are 92 million tons, more than the 80 million tons estimated on MOU.
In addition, the coal mine's net profit in 2009 was 378 million yuan, higher than the bank's previous estimate of 300m yuan. As a result, the acquisition corresponds to 25.3 yuan per ton and 6.2 times 2009 price-to-earnings ratio.
At the same time, the company announced another coal mine acquisition plan: the company signed a memorandum of understanding with two individuals, saying it would acquire a 30% stake in Shanxi Dantangou coal mine. The coal mine has a production capacity of 900000 tons and reserves of 21.6 million tons. Given that the purchase price and the specific plan are still unknown, Shenwan did not reflect the profit forecast in the model. Assuming that the details of the acquisition are similar to those of Tyco, the acquisition will continue to benefit the company.
Shen Wan said that taking into account the contribution of Taiye in the model, it was 30 million yuan in 2009 and 120 million yuan in 10 years. However, Shen Wan's estimate of the rights issue plan is more optimistic than before, predicting that the amount of the additional issue will be 250 million, compared with the previous forecast of 330 million. As a result, the dilution effect will be smaller, with Shenwan raising its 2010 / 2011 earnings per share forecast to HK $0.18 per share of HK $0.24.
Lou Dong Junan Resources fell 3.64% yesterday to close at HK $1.59.