Meteorological stations forecasted last week that in several provinces of The People's Republic of China, especially in the north and northeastern part of the mainland, this wintertime is expected to be one of the coldest in over a century, which should worsen the ongoing energy shortage.
To make sure that the local population will have enough energy and heating, the Chinese government asked coal mining companies to increase their output to supply electricity companies. Higher coal output coupled with an expected increase in the price per metric ton of coal should drive up the profits (and thus the share prices) of many Chinese coal miners over the upcoming months.
Thus, investors may want to consider opportunities among operators engaging in the coal business. Shaanxi Coal Industry Co Ltd (SHSE:601225, Financial) is one company in this sector that I like, since it is well-positioned to benefit from the expected rise in the price of coal.
Based in Xi'an, Shaanxi currently produces coal in the Binhuang mining area of the northern province of Shaanxi. Here, the company holds coal reserves totaling approximately 34.5 billion tons. Before the commodity is sold in northern and other domestic markets, the company must engage in washing, processing and transportation activities. Shaanxi is also an exploration company, looking for new opportunities to mine coal.
In the third quarter of 2021, Shaanxi generated a net profit of 5.97 billion Chinese Yuan ($930 million). This was down 8.04% on a year-over-year basis (likely due to record low prices), but it represented a tremendous improvement sequentially as it increased by 21.5% from the second quarter. The improvement was a consequence of higher coal prices.
The market got wind of the strong sector tailwinds before the company announced its quarterly data. In fact, the stock closed at an all-time high of ¥16.83 per share on Sept. 23 to crown a three-week sharp rise.
With Newcastle Coal Futures at $149.35 per metric ton as of the writing of this article and expected to reach $185 within 12 months, this stock could hold an unbelievable upside potential as coal enters a strong bull market.
For full-year 2021, analysts project that Shaanxi Coal will bring in total revenues of ¥156.67 billion, up 65.2% year over year, while earnings are expected at ¥1.95 per diluted share vs. the ¥1.54 reported by the miner for 2020.
The stock doesn’t look expensive compared to forward earnings estimates. It is also trading significantly below the 50-day moving average value of ¥13.65. The share price was ¥11.48 (approximately $1.80) at close on Tuesday for a market capitalization of ¥111.30 billion and a 52-week range of ¥9.07 to ¥16.83.
Furthermore, the financial conditions look strong as of Sept. 30. The balance sheet had ¥53.12 billion in cash on hand and short-term investments against a lower total debt of ¥10.25 billion. Plus, the current ratio of 1.68 and the interest coverage ratio of 46.41 are indicating that the company is generating enough cash flow from current operations to satisfy short-term creditors, including the payment of interest expenses maturing on the outstanding debt.
