Chinese coal mine Consolidation continues.
Chinese Coal stocks strong today and are about to turn Green on the day.
YZC, LLEN, PUDA, CHGY.ob
Digging for Value in China’s Coal Industry
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WITH CHINA’S CONTINUED GROWTH, China Energy Corp. (OTC:CHGY) and L&L Energy, Inc. (NASDAQ:LLEN) could power up any stock portfolio. The two coal producers stand to benefit from the industry’s rapid growth rate and numerous consolidation opportunities.
China’s coal industry has seen a 6.5% compounded annual growth rate between 2004 and 2008, as the commodity now accounts for nearly 70% of primary energy consumption. But unlike in the U.S. and Australia, the industry is highly fragmented and inefficiently operated.
In fact, he top four coal companies in China account for just 20% of production, compared to 70% and 71% in the U.S. and Canada, according to Chinese officials. As a result, the government is pushing towards consolidation to improve efficiency and safety at the mines.
This has created enormous opportunity for rapid growth through acquisitions in the sector. The forced closure of many coal mines has a number of sellers desperately trying to attract interest from buyers at very attractive prices, giving publicly-listed companies an enormous advantage.
China Energy Corp. (CHGY, Free Analysis) and L&L Energy, Inc. (LLEN, Free Analysis) are two such coal companies, with access to U.S. capital markets to finance a number of these cheap acquisitions, that remain undervalued despite a significant rise in share price over the past weeks.
In fiscal 2009, China Energy reported earnings of $5.1 million, or $0.11 per share, on revenues that jumped 110% to $41.7 million. While its price-earnings ratio stands at around 33x, the stock appears cheap when taking its top and bottom line growth rates into account.
Meanwhile, the company’s balance sheet also remains relatively strong with over $5 million in cash and a quick ratio of 1.62x. However, a current ratio of just 0.53x and an increase in construction spending could be two things to watch going forward.
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L&L Energy is more modestly valued at around 16x its trailing 12-month earnings with revenue growth of 27.5% and net income growth of over 600% in fiscal 2009 versus fiscal 2008. LLEN is also traded on the Nasdaq, giving shareholders greater liquidity than the OTC markets.
Meanwhile, the company maintains a very robust balance sheet with over $15 million in cash, a quick ratio of 2.91x, and a current ratio of 2.22x. This could make LLEN one of the safest and cheapest plays in China’s coal industry as of right now, according to some investors.
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China’s coal industry is highly fragmented and the government is aiming to change that by imposing minimum production levels.The move to consolidate the industry has created a lot of bargain buys for larger coal operations with the cash to finance acquisitions.China Energy and L&L Energy are rapidly growing players in the industry that are undervalued given their growth rates and future potential.
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Written by Simon Monger