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.