Rebounding from 9M09 results

WHAT HAPPENED

Hidili (1393 HK) announced its 9M09 earnings on 8 January. Revenue and net profit were down by 54% YoY and 77% YoY to Rmb948mn and Rmb204mn, respectively, in the first 9 months of 2009, somewhat below our and market expectations with regards to the 2009 full-year forecast. 

ANALYSIS

è  Falling prices drove down earnings. We find that 3Q09 earnings have slightly improved from 1H09. During 1H09, Hidili’s net profit declined by 78% YoY. The plunge in earnings is mainly because of a 24% YoY decline in coking coal prices during the period.

è  Earnings downward revisions. Bloomberg consensus for 2009 net profit is Rmb467mn, indicating that earnings downward revision for 2009 is likely. We will also revise down our 2009 earnings forecast.

è  Believing in turnaround. However, we believe in a turnaround in 4Q09 and an extended rally in 2010 in coking coal prices, due mainly to the strong demand from steel producers. We expect coking coal prices to increase by 19% YoY in 2010 to Rmb1,463/t. The current spot coking coal price as quoted on 4 January was Rmb1,280/t. 

è  Surge in production output. Apart from benefiting from rising coking coal prices, Hidill’s newly commissioned coal washing plants will lift its 2010 coking coal production by 1.2 times to 1.28mt from 0.58mt in 2009 in our estimate. We think the rising coking coal prices and production output will continue to underpin Hidili’s robust growth in earnings in 2010, in which we expect over 100% YoY growth to Rmb1.1bn to 1.2bn.

ACTIONS

We reiterate BUY and shall review our earnings forecast and target price of HK$10.75 (which is based on 16x FY10 PER).