Mobius Bullish on China Coal as Valuations Rise From Lows

Chinese coal stocks are rebounding from their cheapest levels on record as investors including Mark Mobius bet that demand for the fuel will recover as winter approaches and inventories are trimmed.

The CSI 300 Energy Index, which gets 75 percent of its value from coal producers, has dropped 15 percent in the past six months, as prices of the fuel sank to the lowest level since October 2009. That’s more than the 8 percent slump in the wider CSI 300 Index. Shares of the four biggest coal miners may gain an average 25 percent over the next year, according to data compiled by Bloomberg.

“These companies are not only mining but also producing power and the demand for power is insatiable in China and everywhere else in the world,” said Mobius. The Hong Kong-based executive chairman of the Templeton Emerging Markets Group, which manages about $40 billion in assets, said he’s “bullish” on coal companies.

Energy stocks trade at 11.2 times estimated earnings, after touching 10.2 times on Aug. 31, the lowest level since at least 2007, based on weekly data compiled by Bloomberg. Coal prices have stabilized and may recover in the fourth quarter, according to China International Capital Corp., the top-ranked brokerage for China research by Asiamoney magazine, and UOB Kay-Hian Ltd.

Coal demand has weakened as China’s economic growth moderated, hitting 7.6 percent in the three months ended June, the slowest pace since 2009 and a sixth quarterly deceleration. Gross domestic product may cool to 7.4 percent this quarter before rebounding to 7.7 percent in the fourth quarter and 7.9 percent in the first period of 2013, according to the median estimates in a Bloomberg News survey.

Falling Prices

Ten consecutive months of contraction in manufacturing, as measured by a purchasing managers survey released by HSBC Holdings Plc and Markit Economics, has also eroded downstream demand for the fuel and helped drive the average benchmark price for China’s power-station coal to as low as 627.5 yuan ($99.20) per ton, according to weekly data from the China Coal (601898) Transport & Distribution Association.

Prices, which were last at 630 yuan per ton on Sept. 23, may be poised for a seasonal rebound. Chinese thermal-coal prices have gained in September and October in each of the past three years. They fell in 2008 amid the global financial crisis.

“Demand for thermal coal would certainly increase as winter nears, and it would be a good signal for the industry,” Wang Cheng, a Shenzhen-based analyst at Ping An Securities Co., said Sept. 5 in a telephone interview.

‘Meaningful Recovery’

Coal prices may stage “a meaningful recovery” late this quarter or in the fourth quarter as the economy stabilizes and after companies cut output, according to Cai Hongyu, an analyst at CICC. Prices may rise 3 percent in the fourth quarter to 650 yuan as utilities increase stockpiling amid a drop in supplies, Helen Lau, UOB’s Hong Kong-based analyst, said in an e-mailed note Sept. 20.

China Shenhua Energy Co. (601088), the nation’s biggest producer of the fuel, added as much as 2.3 percent to 23.03 yuan in Shanghai trading today. The stock has dropped 10 percent over the past six months and reached the lowest level in more than two years this month.

The company’s net income is forecast to climb 3.4 percent in 2012 to 47.2 billion yuan, and may rise 5.6 percent to 49.9 billion yuan in 2013, according to data compiled by Bloomberg.

Shenhua Energy is looking to buy more coal-fired power plants in developed areas and is speeding construction of some projects including extending the capacity of its Heidaigou and Ha’er Wusu mines, Company Secretary Huang Qing said on Sept. 11 in Hong Kong. The company is able to run its mines profitably even as coal prices fall, and expects prices to rebound to about 650 yuan a ton in the fourth quarter, Huang said.

Opportunity to Expand

“They will be growing and they are expanding overseas as well,” said Templeton’s Mobius, whose funds currently hold shares of Shenhua, Yanzhou Coal Mining Co. (600188) and China Coal Energy Co. “The slowdown that we’ve seen in global markets means there’s an opportunity for these companies to buy mines at low cost.”

All 26 analysts tracking Shenhua’s Shanghai-traded A-shares have the equivalent of a buy rating on the company and an average 12-month share-price forecast of 28.12 yuan, up 25 percent from yesterday’s close, according to data compiled by Bloomberg.

Datong, Yanzhou Coal

China Coal, the second largest, and Datong Coal Industry Co. may gain 21 percent, and 14 percent, respectively, according to the analyst forecasts. Yanzhou Coal shares are forecast to surge 38 percent, the data show. The stocks each gained at least 1 percent today.

A rebound may be limited as the economy struggles to recover from the slowest expansion in three years and the government encourages alternative energy use to cut pollution.

Hydroelectric generation climbed 48 percent to 94.4 billion kilowatt-hours in August, following a record number of typhoons in China. Thermal output slid 6.3 percent during that month, according to the China Electricity Council.

“It wouldn’t be good to invest in the coal industry in the coming six months,” He Wei, an analyst focusing on the coal industry at Bocom International Holdings Co., said in a Sept. 6 telephone interview. “The unexpected slowdown of the economy has led to severe problems of overcapacity, while demand is decreasing.”

Those concerns may already be reflected in share prices. Wu Kan, a Shanghai-based fund manager at Dazhong Insurance Co., sold shares of coal companies earlier this year and is now optimistic on the industry in the next three months.

“The destocking cycle is shorter than other industries, and the performance would bolster its growth,” Wu, whose company oversees $280 million of assets, said in a Sept. 12 telephone interview. “The price of coal will increase and the share prices will rise.”

To contact Bloomberg News staff for this story: Raymond Liu in Beijing at rliu118@bloomberg.net; Kevin Hamlin in Beijing at khamlin@bloomberg.net

To contact the editor responsible for this story: John Liu at jliu42@bloomberg.net

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