China Shenhua Options Signal Worst Over With Record Bullish Bets
By Jonathan Burgos
(Bloomberg) — Bullish bets on China Shenhua Energy Co.
jumped to an all-time high on optimism that output curbs will
finally staunch a slump in coal prices.
Calls that pay should Hong Kong-listed China Shenhua gain
10 percent cost 8.3 points more than bets on an equivalent drop
on Friday, three-month options data compiled by Bloomberg show.
The gap widened to 9 points on May 19, the most in Bloomberg
data dating back to February 2010. Shares of China?s biggest
coal producer fell 42 percent from the start of 2012 through
last week as the price of the fuel plunged.
?Shenhua has come down to very attractive levels and the
downside risk for the stock looks really limited,? Helen Lau,
an analyst at Argonaut Securities (Asia) Ltd. in Hong Kong, said
by phone. ?We expect demand for coal in the second half to
recover. That together with production cuts in the industry
should help support coal prices.?
China, the world?s largest market for coal and worst
carbon-dioxide emitter, is acting to protect the industry as
slowing economic growth and efforts to curb pollution take a
toll. The China National Coal Association estimates that more
than 80 percent of the country?s producers are losing money.
The weekly average price of power-station coal at
Qinhuangdao, the nation?s biggest port for delivering the fuel,
was 410 yuan ($66) a metric ton as of May 24, data from the
China Coal Transport and Distribution Association show. While
increasing slightly from an almost nine-year low set a week ago,
that?s still down 48 percent from the start of 2012 when prices
began to tumble.
Output Cuts
The government is targeting a 10 percent output reduction
and plans to ban low-quality coal imports. The Finance Ministry
is also studying trimming the value-added tax on the fuel, and
the industry is seeking to trim production by an additional 5
percent, the China Securities Journal reported last month.
?We?ve had some supply cuts,? Ghee Peh, an analyst at BNP
Paribas SA in Hong Kong, said by phone. ?The reduction may help
coal prices in the short-term.?
While the moves seem promising, it?s difficult to see an
immediate recovery given the slowdown in the Chinese economy,
according to First Shanghai Securities. Data from factory output
to retail sales and new lending released this month all trailed
estimates, suggesting three interest-rates cuts since November
have yet to revive momentum.
Investors should ?steer clear? of coal miners including
China Shenhua, China Coal Energy Co. and Yanzhou Coal Mining
Co., amid ?intense demand destruction,? according to Jefferies
Group LLC. China Shenhua slipped 0.1 percent at the close in
Hong Kong after earlier rising 1.8 percent. China Coal climbed
1.9 percent and Yanzhou Coal advanced 1.4 percent.
Economic Uncertainties
?There are still a lot of economic uncertainties,? Linus
Yip, an analyst at First Shanghai Securities in Hong Kong, said
by phone. ?Coal prices are continuing to come down.?
The HSI Volatility Index, which tracks the cost of options
on Hong Kong?s benchmark Hang Seng Index, jumped 6.8 percent to
20.04 on Tuesday. The market was shut Monday for a holiday, as
were those in the U.S. The Chicago Board Options Exchange
Volatility Index, or the VIX, slid 2 percent to 12.13 last week.
Implied volatility, used to gauge the cost of options, for
three-month contracts with an exercise price 10 percent above
China Shenhua?s shares was 34.6 Friday, compared with 26.3 for
puts 10 percent below, according to data compiled by Bloomberg.
Even if coal prices don?t recover in the short-term,
Argonaut?s Lau said China Shenhua should still outperform rivals
given its more diversified earnings. The company?s power
generation business accounted for about 30 percent of total
revenue in 2014, with coal production contributing 66 percent,
according to data compiled by Bloomberg. Meng Jian, Shenhua?s
Beijing-based spokesman, did not answer two calls on Thursday to
his office seeking comment.
Profit Projections
China Shenhua?s net income will slide 16 percent this year,
while China Coal, the second-biggest producer, is expected to
swing to a loss, according Bloomberg surveys. China Shenhua
traded at 9.5 times trailing earnings on Tuesday, compared with
a multiple of 216 for China Coal, according to data compiled by
Bloomberg.
?China Shenhua?s fundamentals are stronger compared to
other coal companies,? Lau said. ?It?s a safer bet.?DONE!!