H-Share perspective: increase in the target price of coal 30%

In May, after the growth of BOC International, China Coal Energy (1898) June coal production and sales growth accelerated. We think that with the recovery of swimming and the rise of steel prices, there will be further improvement in the demand outlook. We have raised the rating of both A and H shares from holding to buy and raised the target price after giving a higher p/E. 　　We have raised the target price of H-shares from HK $8.33 to HK $11.15 (by: Up 33% and 9.77 yuan yesterday). Raw coal and coal sales in June increased by 23% and 12% respectively year-on-year, higher than the year-on-year increase of 20% and 6% in May. The large-scale production of Antaibao Open-pit coal mine with an annual output of 8 million tons is the main reason for the growth of production in May. 　　With Cheng Li Gu, coal sales have increased. In the first half of 09, the company's raw coal production grew 6% to 49 million tonnes, achieving 49% of its annual forecast of 99 million tonnes. Although sales were slightly increased by 4% per cent year-on-year, exports fell by 83% per cent year-on-year, resulting in total sales still dropping 3% per cent year-on-year. 　　Overall, total sales in the first half of the year have reached our 82 million-ton annual assumption of 48%. Coal-mine equipment business continued to benefit from the rapid growth in fixed asset investment in the coal sector, which grew by 38% in 09 January-May. Output in the first half of the business grew 37% year-on-year. 　　We made a modest adjustment to some of the assumptions, including an increase of 1 million tonnes of raw coal production and coal sales forecasts for the year 2009, and we adjusted less than 1% per cent of the 2009-11 earnings forecast accordingly. Sustainable generation contribution of new mines we expect China's economy to continue to recover for the remainder of 09, especially after the June turnaround in electricity generation. It is expected that the increase in investment in fixed assets of the infrastructure and real estate sectors should boost demand for steel, thus boosting demand for coking coal and coke and pushing up prices. In addition, the new mine should be sustainable to generate contributions. 　　So we think the worst of the company is over. In view of the improvement of the outlook, we will increase the share and H-shares by the holding to buy. 　　Recently, we raised the 601088.SS;1088.HK 2009 forecast-earnings ratio from 15 times to 20 times, the equivalent of the high end of the stock's normal stock range, because we believe the unit should have a higher valuation in the economic recovery cycle. The same is true of medium coal energy. As we continue to give the unit a forecast earnings ratio of 10% per cent for 09, the 2009-year target price-earnings ratio has been raised from 13.5 times to 18 times-fold. We have therefore raised the target price of H-shares from HK $8.33 to HK $11.15. As for a-shares, we continue to adopt a 69% per cent premium on the H-share (the a-h three-month average premium level), which would raise the target price from 12.32 to 16.50 yuan.