Thursday, October 11, 2007


UBS New Target Price For Shenhua HK$101!!!

I thought I was bullish, but was forwarded the latest piece of research from UBS dated today. Mind you, Shenhua's high price today was around HK$52.00 ... so the target price can make or break careers! Added to that, Shenhua will be added to all the indices for Shanghai from October 23.

Here's the summary:

UBS Investment Research

China Shenhua Energy Coal

12-month rating Buy Unchanged

12m price target HK$101.00/US$12.92

Macro reality, raising PT to HK$101

• Moving beyond conventional valuation According to our estimates, Shenhua’s current share price is already reflecting the stock at 33x 2008E on up-cycle earnings, the DCF is pricing in acquisitions and operations at a long-term coal price of US$70/t, 3% less than the all-time high regional spot price. We believe a suitable approach is to try to look at the positive macro coal price environment and try to quantify the valuation upside.

• No historical precedent for macroenvironment The challenge for coal equity valuations is that the China coal pricing environment does not have a historical precedent—China becomes a net importer and there was very little coal price weakness in Q3. We believe the key issue is the valuation of China’s largest coal company if there is a coal shortage.

• What is the right price: using A-share comparables We think a relevant measure is the amount domestic investors would be willing to pay and we use a 15% premium to the highest domestic coal stock’s PE. If we run earnings at spot coal prices, our 2008E scenario PE at our price target is 45x. The implicit long-term coal price at our price target is US$150/t. At current natural gas prices the equivalent coal price is US$130/t.

• Valuation: raising our PT from HK$35.15 to HK$101 We base our price target on a 15% premium to the highest traded domestic coal stock at a target multiple of 74x.

6 comments:

xatomic said...

funny..

huge buying volume yesterday for BOC-C1 last minute before trading close..and today BOC H-share surged in HKSE..needless to say the corresponding warrant in bursa..those who still hold it, good for u :)

I knew bout the exorbitant UBS rating call..didnt expect Shenhua to rise like mad today..analyst was like resorting to other form of valuation to justify the high target price..

it really raise my doubts now bout the sustainability of this strong bull run...how long more can we ride on it?

having said that..salvador, your bullishness on the H shares is one of the best calls around this year..:)

The Rock said...

Each time someone try to justify ever higher valuation with some creative methods, you know that the end is coming. Remember the tech bull in 2000 - it's not the profits. But the business model - the eye balls that visit your website that counts.

Well just be careful - not all Chinese companies are equal. Personally I like PetroChina and Sinopec for oil exposure. I will avoid all banks as their accounting are not up to international standards - outsiders will never know the real worth of their assets.

cheers Hari Raya

Steven said...

Hi Dali,

I'm curious as to why Petrochina-C4 seems to be lagging behind C1... From what I know (please correct me if I'm wrong), their gearing and conversion price are about the same... But C4 only expires in May 2008.

So why the investor preference for C1?

Thanks for explaining to a novice.

Eric said...

Hi Dali,
Great call for ur china stocks...
however, do u know the conversion for these shares, for example petrochina-c4.
It seems to me its overvalued.... based on closing price today, it is hkd15.44. exercise price is hkd11.50, with conversion is 5:1.
So the difference is (15.44-11.5)/5=0.788.
0.788*0.438 =0.345 ringgit (0.438 is the exchange rate of 1hkd to 1 ringgit).
but now, petrochina-c4 is 0.42.
please advise if my calculation is correct or not.
thanks!

Salvatore_Dali said...

steven

pet4 is now very cheap and its gearing is more than double that of pet1 and 3... holder of pet 1 and 3 should immediately switch to pet 4 for better time value and gearing .... but people do gravitate to liquid issues, where vol is seen, there will be enuff liquidity to go in and out ... vol not building up yet, but it will come, hold onto pet4

Salvatore_Dali said...

eric u r wrong, pls go to cimb portan andget the warrants digest which tracks the relative premiums and gearing...

http://warrants.cimb.com/WRT/index.jsp