Fushan International Energy (639 HK)： Wanted mining right

China/Hong Kong Metals & Mining Please read the analyst certification and other important disclosures on last page Fushan International Energy (639 HK) 26 August 2010 Wanted mining right Company Rating: Sector Rating: Outperform (initiation) Neutral (maintained)
Mining right – catalyst for share rebound. We initiate coverage on Fushan International Energy with an Outperform rating and target price of HK$6.50 (50% price upside). The stock has fallen 43% year-to-date after investors lost patience on its M&A strategy. Valuation has improved to 13.2x P/E and a dividend yield of 3.8% for FY11F, offering strong downside protection. The clinching of the mining right will be the powerful catalyst for Fushan’s share price.
Reversal of industry dynamics. The industry outlook has improved as steel spot prices bounced back 7% from the July 2010 trough on hopes of easing monetary policy ahead. As steel prices usually lead coking coal prices by one quarter on average, coking coal prices are set for another uptick.
A shooting star. With a near-term development prospect of a huge coking coal mine (Lianshan) and Shougang’s solid backing, Fushan can be a shooting star once the wanted mining right is in place. We forecast Fushan’s earnings to jump by 32% CAGR in 2010-2012F, driven by coking coal price hikes (10% p.a.) and the development of Lianshan mine, which could more than triple its reserves.
BUY with price upside of 50%. Our DCF valuation gives a price target of HK$6.50, incorporating a 11.5% WACC and a long-term coking coal price of RMB600/tonne (vs. spot: RMB812/tonne). We see NPV upside to HK$11.85 if Fushan can unlock the value of Lianshan mine.
Risks. Pullback in coking coal prices, higher-than-expected cost pressure, M&A slippage and policy risks. Forecast and valuation Year to 31 Dec 2008 2009 2010F 2011F 2012F Revenue (HK$m) 1,897 4,470 5,149 6,154 8,056 YoY change (%) N/A 136 15 20 31 Net income (HK$m) 568 1,127 1,724 1,847 2,600 YoY change (%) N/A 99 53 7 41 EPS (HK$) 0.17 0.23 0.32 0.33 0.46 PER (x) 25.6 18.7 13.5 13.2 9.4 DPS (HK$) – 0.22 0.16 0.16 0.23 Dividend yield (%) – 5.2 3.7 3.8 5.3 ROE (%) 5.2 7.1 10.0 10.0 13.2 ROA (%) 2.9 5.0 6.9 6.9 8.9 Source: Company data, CCBIS estimates Price: HK$4.32 Target: HK$6.50 (initiation) Trading data 52-week range HK$3.70-8.77 Market capitalization (m) HK$23,458/US$3,027 Shares outstanding (m) 5,381 Free float (%) 67 3M average daily T/O (m share) 21.9 Expected return (%) – 1 year 50 Closing price on 26 August 2010 Stock price and HSI 80100120140160180200Jul-09 Aug-09 Sep-09 Nov-09 Dec-09 Jan-10 Mar-10 Apr-10 Jun-10 Jul-10 Aug-10FushanHSI Source: Bloomberg Karen Li, CFA (852) 2532 6748 karenli@ccbintl.com Yan Tsui (852) 2532 6164 yantsui@ccbintl.com Fushan International Energy (639 HK) 26 August 2010 2 Table of Contents Wanted mining right ...................................................................................................................................................... 1 Investment summary..................................................................................................................................................... 3 Valuation ....................................................................................................................................................................... 4 Investment case............................................................................................................................................................ 6 Investment concerns................................................................................................................................................... 10 Key assumptions......................................................................................................................................................... 11 Earnings outlook ......................................................................................................................................................... 12 Industry outlook........................................................................................................................................................... 15 A glance at coking coal demand ................................................................................................................................. 18 Company background................................................................................................................................................. 19 Risk Factors ................................................................................................................................................................ 22 Financials ................................................................................................