Resource Alam Indonesia, Losing steam

Weak demand from China will negatively impacted KKGI’s sales volume
As mentioned in the Coal Asia Magazine (Jul-Aug’12 edition), stockpile in one of China’s biggest coal port, Qinhuangdao, already hit the highest level since the 2008 crisis. By June, the stockpile has reached 9.4m tonnes, already close to the 10.1m tonnes capacity. Noted that coal inventory above 8 m tonnes at the port is already considered to be oversupply.

This indicator signalled a weaker demand from China on coal consumption. In 2011, around 70% of KKGI’s coal export was shipped to China, thus we believe the company’s sales volume growth will be minimal in 2012 due to combine factors of weaker demand and price as well.

Short track record make future outlook clouded
KKGI’s robust growth in production volume was done during the period of booming coal demand between 2009-2011 period, in which the company manage to registered an average annual growth of 82% compared to xx% growth of overall Indonesia coal production. Now that production level already achieved a respectable 4-5m tonnes p.a., the outlook for a couple of years down the road will be strongly related on how the coal demand situation plays out. Thus for conservative purposes, we are estimating a more modest flat growth for 2012 and 16% in 2013.

Poor 1H12 results, justifying our view
KKGI 2Q12 profit dropped 24% q-o-q to IDR75bn as a result of a 2% q-o-q decline in sales volume and ASP while average cash cost creep up 7% q-o-q. On yearly basis, net profit declined by 19% to IDR175bn underpinned by lower sales volume of 11% y-o-y (1.9m tonnes) and rising production cash cost (+14%y-o-y to USD29.5/tonne) amid a slight improvement in ASP to USD57.4/tonne (+6% y-o-y).

Earnings cut and target price reduction prompts for downgrade
Following the aforementioned adjustment, we are reducing our earnings forecast for KKGI by 43% for 2012 and 41% for 2013 which translates to a new target price of IDR5,150, implying 11.8x-9.0x FY12-13f earnings.