China Coal - Caveats

WSJ - China Coal Energy Co.'s H-shares rose after the company estimated that its earnings soared 90% last year and said it plans a second listing in Shanghai, which could raise around US$4.8 billion. China Coal, the country's second-largest listed coal producer by revenue after China Shenhua Energy Co., said it plans to issue as many as 1.525 billion new A shares on the Shanghai Stock Exchange, representing about 11.5% of its enlarged share capital.

The company didn't say how much it hopes to raise from the IPO, but based on the closing price of its Hong Kong shares on Monday of HK$24.75, it could raise as much as HK$37.74 billion, or US$4.84 billion. Yesterday, shares of China Coal rose 2.6% to HK$25.40, after hitting a high of HK$26.30 earlier in the session. The benchmark Hang Seng Index ended down 0.3%.

China International Capital Corp. and China Galaxy Securities Co. are the IPO underwriters, China Coal said. China Coal said it expects that its net profit rose to 6.01 billion yuan (US$826.8 million) in 2007, from 3.17 billion yuan in 2006, based on international accounting standards. It didn't elaborate on the profit increase, but the company benefited from a rise of more than 10% in spot coal prices in China last year. Coal is the country's major source of electrical power and China's demand for electricity has been soaring amid its rapid economic expansion.

However, the outlook for China Coal's upside is not as rosy as CNOOC or China Mobile, and definitely we won't see Petrochina's experience being replicated here. The thing is China Coal has already rose four-fold last year, tracking the stupendous rise by China Shenhua Energy.

China Coal's H-share is trading around 48 times estimated 2007 earnings, while China Shenhua Energy H-share is trading around 37 times estimated 2007 earnings. Thus the upside and premium upon listing in Shanghai will be muted, and will drag China Coal H-share price closer to Shenhua's valuation.

The way to play this is to trade and get out before the actual listing date, and use the H-share target price of HK$27-28 as the sell signal.