Yulin And Liquid Sunshine Projects Will Cut Costs Amid Risks

Key Takeaways

• Centralized procurement and fine management aim to reduce costs, enhance production efficiency, and positively impact net margins.
  
• Future revenue growth is anticipated through market expansion, capacity enhancement, and potential asset injections or mergers in coal-related assets.
  
• Declining coal prices and reduced cash flow are impacting China Coal Energy's revenue growth and profitability, highlighting vulnerability to cost and price fluctuations.

Catalysts

China Coal Energy Company Limited mines, produces, processes, trades in, and sells coal in the People’s Republic of China and internationally.

• The company is planning to increase production and improve production efficiency through centralized procurement and fine management, which is expected to systematically reduce costs. This can positively impact net margins by lowering operational expenses.
  
• The integration of coal and coal chemical operations allows the company to benefit from cost reductions in coal, contributing to stable gross profit margins in the coal chemical segment, thus supporting overall earnings stability.
  
• The ongoing development of the Yulin Coal Chemical Phase 2 and the Liquid Sunshine projects, with their expected completion timelines, indicate future capacity expansion that can lead to increased revenue generation.
  
• The company’s focus on consolidating and expanding market share through strengthening marketing efforts suggests potential revenue growth as it increases its competitive positioning and sales volume.
  
• In the longer term, potential asset injections or mergers and acquisitions in coal-related assets can boost the company’s revenue, earnings, and possibly lead to greater economies of scale, enhancing net margins.

China Coal Energy Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming China Coal Energy's revenue will decrease by 1.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 10.1% today to 9.4% in 3 years time.
• Analysts expect earnings to reach CN¥16.4 billion (and earnings per share of CN¥1.16) by about May 2028, down from CN¥18.3 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CN¥18.5 billion in earnings, and the most bearish expecting CN¥12.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.7x on those 2028 earnings, up from 5.4x today. This future PE is greater than the current PE for the HK Oil and Gas industry at 6.5x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.16%, as per the Simply Wall St company report.

China Coal Energy Future Earnings Per Share Growth

Risks

• Declining prices for coal and coal chemical products significantly impacted China Coal Energy's overall revenue, with operating revenue down 15.4% year-on-year for Q1 2025. This could continue to constrain revenue growth if the trend persists.
  
• The company's net profit for Q1 2025 fell by 20%, largely due to the decline in the price of self-produced commercial coal, reducing overall earnings and highlighting vulnerability to commodity price fluctuations.
  
• There was a significant reduction in cash flow in Q1 2025, with net operational cash down to CN¥376 million, reflecting impacts from account payables and reduced net profit, which could challenge liquidity if not managed effectively.
  
• Production costs for some major coal chemical products have decreased, but sales volumes and selling prices for products like polyolefins are down, which could further erode margins if sales do not increase.
  
• There are uncertainties regarding the cost outlook and the impact of rising labor costs and other operational expenses, which may limit the effectiveness of cost control measures and depress net margins if not managed carefully.

Valuation

• The analysts have a consensus price target of HK$9.059 for China Coal Energy based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of HK$10.83, and the most bearish reporting a price target of just HK$5.97.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CN¥174.4 billion, earnings will come to CN¥16.4 billion, and it would be trading on a PE ratio of 8.7x, assuming you use a discount rate of 8.2%.
  
• Given the current share price of HK$8.01, the analyst price target of HK$9.06 is 11.6% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.