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China Coal May Be Mining In Vain For An Earnings Beat

Concerned about air pollution and energy use, China wants to cut its dependence on coal. The world’s second-largest economy wants to restructure away from energy-intensive industries such as steel making and construction in favor of consumption and the service sector. Local coal producers like China Coal Energy (18198.HK) are feeling the effects.

The chart below shows that China’s demand for coal has fallen in the past few quarters with net imports reaching new lows in the third quarter of 2014. When a historically large importer of coal cools down demand, global coal prices fall, as can be seen in the spot price chart below, with coal hovering around the lows of the year.

StarMine research shows that China Coal now has a large negative Predicted Surprise of more than 27% which indicates it may miss already-lowered earnings estimates.


Cut 2

Source: Thomson Reuters Eikon – Coal & Energy Overview

Recommendations down the shaft

The I/B/E/S consensus estimate currently calls for earnings of 0.09 Chinese Renminbi (CNY), but the StarMine SmartEstimate is even lower at just CNY 0.07. That contributes to the low Analyst Revisions Model (ARM) score of 4, which indicates a continued bearish sentiment. To understand the level of analyst pessimism, we can look at the analyst recommendations. There is now just one buy and one strong buy for China Coal. There are 7 hold, 9 sell and 4 strong sells out for the stock, which is even more bearish than just 90 days ago.

Cut 3

Source: Thomson Reuters Eikon/StarMine

Lumps of coal

And the negative sentiment is not restricted to just 2014 either. In the past 90 days, analysts have lowered estimates for revenue in 2015 by 4.3%, EBITDA by 8.2% and earnings by27.9%. Revenues fell in 2012 and 2013, and based on the latest estimates, likely continued that trajectory in 2014.

Cut 4

Source: Thomson Reuters Eikon/StarMine

Digging for good news

And in a double whammy for China Coal, revenues are declining amid falling margins, and that means plummeting earnings. The most common margin measures — gross margin, net margin and operating margin — are all at 10 year lows, and far below the industry median. That just means that China Coal has an uphill climb to keep up with its peers in the region.

Cut 5

Source: Thomson Reuters Eikon/StarMine

Cash flow woes

Finally, China Coal has seen negative free cash flow in each of the semi-annual periods over the last five years. In the last semi-annual period, despite a net income of CNY780 million, the company had a negative free cash flow of CNY9.3 billion, its poorest in the last five years. Three of the last four semiannual periods have seen cash outflows of over CNY9 billion. That’s even more worrying given that the company has more than CNY70 billion in total debt, which has increased by almost six times in the last three years. It’s part of the reason the company scores so poorly on our credit models. All these signs point to a difficult 2014 report and a likely earnings miss.

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