Key Points:
◆       Fushan Energy has become an important player in the coking coal market. Following this July’s acquisition, the company is in the top 15 in the prime coking coal market in China. Fushan has a coking coal capacity of 6.3Mt, and is located in Liulin, which is one of the most important coking coal producing areas in China.
◆       Fushan has good operating efficiency. The company’s productivity is among the highest in China, and the company has not had a fatal accident for four consecutive years. Fushan’s raw coal unit cost was Rmb92.61/tonne in 2007, much lower than its competitors.
◆       Growth potential: Fushan is applying for mining rights, and planning to build a coal mine with annual production of 4Mt. In addition to which, Luensang Energy has a number of other coal mines with a total capacity of more than 5Mt. All of these give Fushan Energy growth potential.
◆       Coking coal prices may decline. Although we think current coal prices are unsustainable, the outlook for prices may not be as pessimistic as the market expects due to limited coking coal resources and a slow rate of capacity growth. We assume the ASP of raw coal to be Rmb943, Rmb722 and Rmb504 between 2008 and 2010, and we assume long-term ASP to be Rmb454 from 2011 onwards.
◆       ACCUMULATE. EPS forecast is HK$0.24, HK$0.54 and HK$0.35 from 2008 to 2010. The reasonable value is HK$4.52 based on DCF, and is HK$3.51 based on the PE ratio of its peers. We think long-term value is emerging, but the coking coal price will decline in the short term, leading us to give an ACCUMULATE rating on the stock, with a target price of HK$4.02.
◆       Risks. The two engines of the Chinese economy, exports and property, may face difficulties in 2009, and coal demand may be below expectation. Government may put in place a resource tax reform from 2009, possibly with a tax rate of > 5%.
 
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