《2010年德意志银行煤炭行业市场研究报告》(3个文件).rar Divergence:　Strong　physical　coal　price　but　weak　coal　equities Physical　coal　prices　have　been　very　strong.　The　positive　momentum　that　was　kickstarted by　the　drought　in　Western　China　has　been　sustained　by　early　inventory build　and　mine　accidents.　On　the　other　hand,　coal　equities　have　been　weak　due　to concerns　regarding　resource-tax　reform,　slower　economic　growth,　rising　inflation and　flow-through　impact　of　property-cooling　measures.　Most　of　these　formed　our midyear　macro　slowdown　thesis. Midyear　slowdown　playing　out　but　outlook　improving　beyond　midyear Our　midyear　slowdown　thesis　is　playing　out,　and　our　macrostrategist　Jun　Ma recently　highlighted　a　number　of　near-term　macro　risks　for　the　economy　and market.　While　we　agree　with　the　midyear　macro　risk　and　that　macro　will　likely over-ride　industry　specific　in　the　near　term,　we　believe　the　outlook　for　the　coal sector　has　improved,　and　hence　recommend　accumulating　shares　of　Shenhua　and China　Coal　for　investors　with　a　longer　horizon　or　investors　looking　for　outperformance among　high-beta　sectors.　We　see　the　following　positive developments:　1)　lower　probability　of　resource　tax　reform　with　Xinjiang＇s　reform excluding　coal,　2)　the　coming　peak　summer　consumption　months　and　a　possible physical　market　squeeze,　3)　our　previous　concern　over　Shanxi　production　has faded　because　of　tightened　safety　enforcement,　4)　mine　consolidation　and　safety rules　impacting　production　at　other　provinces　such　as　Henan,　5)　valuations　below historical　average,　6)　multiyear　tight　supply-demand　outlook　holding　up,　7) business　defensive　structurally　because　contacts　lock　in　price　and　volume,　and　8) macro　outlook　in　late　2010　actually　looks　brighter,　with　solid　economic　growth　and steady　inflation.　Once　we　sail　past　the　midyear　risks,　we　expect　the　sector　to　offer absolute　performance　as　well. Supply-demand　to　remain　tight Production　growth　of　coal　and　the　downstream　segments　has　been　strong　in 1Q10,　with　growth　of　over　20%　yoy.　While　the　full-year　growth　rates　cannot　be sustained　at　such　a　high　level,　we　are　not　overly　concerned　as　we　expect　growth in　supply　(coal　production)　and　demand　(downstream　segment　production)　to　slow yoy,　extending　the　tight　market.　Among　downstream　segments,　steel　production appeared　high,　but　that　should　affect　mainly　coking　coal　and　not　thermal　coal. Australia　Resource　Super　Profits　Tax　(RSPT)　update Australian　officials　are　willing　to　negotiate　the　details　of　the　RSPT,　but　the　40% headline　rate　appears　likely　to　stay,　at　least　for　now.　Our　Australia　resource　team has　published　a　report　on　RSPT　and　we　present　a　summary　in　this　report. Valuation　on　SOTP:　Life-of-mine　DCF　for　coal We　value　Shenhua　and　China　Coal　on　the　DCF　of　individual　segments.　We　use　lifeof- mine　DCF　for　coal　mining　with　a　25%　premium　for　acquisitions　or　mines development,　and　use　DCF　with　2.5%　terminal　growth　for　other　divisions.　Key risks　for　the　coal　commodity　and　equities　are　development　in　resource　tax　and worse-than-expected　economic　and　demand　growth　as　we　base　our　coal　forecast on　GDP　forecasts　from　our　economist　and　production　forecasts　from　our　sector