A Coal Company That’s All Fired Up

09/05/2007 12:00 am EST

Focus:

Jim Trippon

Editor-in-Chief, China Stock Digest

James Trippon, editor of China Stock Digest, finds a Chinese coal producer that’s growing faster than many high-tech high flyers.

Taking full advantage of volatility in the markets, the China Stock Digest issued a new “buy” recommendation on Yanzhou Coal Mining Co. (NYSE: YZC) near the market bottom on August 21st.

You may recall that we called for a “sell” on Yanzhou Coal when it hit $86.76 after which the stock price hit a bottom in the $75 range. We then called for another “buy”. Since then the stock has been sizzling back to the top of the heap. The new target price [is] currently $100, but our targets may change as circumstances warrant. (The ADRs closed at around $90 Tuesday—Editor.)

As we mentioned earlier, industrial production in China continues to rise even faster than the increase in the nation’s GDP. Yanzhou Coal is benefiting from a number of developing trends that give us confidence in higher valuations for this company. Unlike many other staple resources, coal prices are not strictly capped by the government, and prices are being squeezed upward by both supply and demand.

On the supply side, the Chinese government is shutting down tens of thousands of small, unsafe coalmines throughout the country. Future supplies will be further squeezed by the government’s attempt to hold down future fixed asset investment and the very long time lines involved in building major mines.

Demand is driven by industrial growth and by China’s hunger for increasing amounts of electricity. Coal is by far the most important fuel for generating stations. Yanzhou Coal is an industry leader because of its proximity to the industrialized eastern region of China.

In addition to being close to major industrial markets, the company operates a number of rail lines, giving it priority in its access to steel and power generation markets. The company runs six mines in China, producing coal for electricity generation and for metallurgical production. It also owns the Austar mine in Australia, with a companywide total of approximately two billion metric tons of reserves.

We expect Yanzhou Coal to suffer less than its rivals from the effects of environmental controls because its reserves are largely in low-sulfur deposits. Yanzhou Coal is considered a leader in the technology of mining, generating greater efficiencies and higher profits. Record high oil prices will continue to push the demand for coal.

We believe Yanzhou Coal is uniquely positioned to continue to reward investors with stable growth and dividend returns. The company saw annual earnings per share growth of more than 100% over the past 12 months, justifying the estimated P/E ratio of 17x. Yanzhou returned a dividend of 1.5% for the trailing 12-months period. The company has delivered excellent returns to our subscribers in the past and it has already rewarded subscribers who heeded our most recent “buy” recommendation.

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