Coal Investment Strategy in 2013

According to estimates, the coal production capacity in 2013 may reach 4.63 billion tons, which will greatly exceed the demand of 4.12 billion tons. In 2012 and 2013, 900 million tons of new production capacity will be added, of which an average profit of about 600 million tons will be less than 40 yuan/ton (corresponding to 2011 Coal price) Most of these mines are currently depleted at current prices, so many new production capacity does not necessarily translate into production. We estimate that if the current comprehensive price falls by 5% (Qingang 5500KC drops to 610 yuan), it may lead to a stoppage. The output reached nearly 800 million tons, which is expected to provide strong support for coal prices. As the new production capacity of coal is mainly concentrated in the vicinity of break-even, coal prices will be more difficult to rise and rise, and coal price fluctuations are expected to decrease significantly in the future.

In 2013, the dynamic P/E ratio of mainstream coal companies will be 18-20 times. Due to the reduction of coal price volatility, the low-valuation companies with significant production growth and cost advantages are expected to win in 2013. Therefore, our 2013 investment ideas suggest concern:

1. Yongtai Energy, Shanmei Coal International, with rapid growth in production capacity and competitive advantages in products.

2. Low-cost, high-quality coal companies with cost advantages, such as Luan Huaneng and Lanzhou Kechuang.

3. China Shenhua, which has sufficient profits and sufficient customer and transportation advantages. The risk hints that the small coal mine will resume production and the coal price will fall more than expected.