BEIJING (TheStreet) -- China is the largest consumer of coal in the world, both in terms of power generation and in terms of supplying coal to the coking industry for making steel. Despite all the progress being made in clean tech areas, such as solar and wind, coal is and will continue to be the predominant source of energy in China for the foreseeable future.
The economic and stock market rebound over the past year has translated directly into massive gains in the coal industry. Continued growth in China over the coming years makes coal an attractive investment opportunity. Currently the three best ways to play coal in China are
and, the best in my opinion,
Sino Clean Energy
Yanzhou Coal is a giant in the world of coal. The company operates in all aspects on coal mining, sales and rail transportation of coal. At present, the company is trading via ADRs on the
, as well as through listings on the Shanghai and Hong Kong exchanges. Its current market cap is more than $13 billion and it has returned more than 400% since this time last year, when it reached a low of $5.11 vs. its current price of more than $22.00.
YZC boasts gross margins of nearly 50%, has about $2 billion in cash on its books and is consistently highly cash-flow positive. In addition, the company has an attractive dividend yield of more than 2.6%.
YZC makes for a great play on the long-term growth of China. It is a solid large-cap stock with a healthy dividend yield in an industry that isn't going away. The benefits of owning include a play on energy as well as international diversification for a broader portfolio. However, I feel that YZC is best viewed as one stock to hold among many, and not one to count on for individual spectacular gains.
The stock has already had its run, and future gains are more likely to come in linear fashion along with economic growth in China. I would expect to see up to 30% upside in YZC from current levels, which is very attractive for a large-cap stock, but certainly not something that will dramatically move a portfolio.
For a stock with more upside, I like small-cap Puda Coal. PUDA uplisted to the Amex exchange in September 2009 and saw its stock shoot up more than 20% on the day. The company is a supplier of high-grade metallurgical coking coal used to produce coke for steel manufacturing in China and a coal mine consolidator of eight coal mines.
The company recently raised $13 million in a common stock offering priced at $4.75 per share to fund the acquisition of two new coal mines. Investors clearly like the story because the stock has risen from below $5.00 to more than $7.00 at present.
Puda trades at only 16 times trailing earnings, which is a clear discount to U.S. comparables such as
James River Coal Company
, which trades at 22 times earnings and
( PCX), which trades at more than 30 times earnings, despite having similar margins to both. As a result, over the next year, PUDA could potentially have 50%-100% upside in its share price.
To find a stock with muti-bagger potential in the coal space, one needs to look at Sino Clean Energy. The company produces coal water mixture -- a viscous, heavy-liquid fuel that is produced by mixing ground coal, water and chemical additives. CWM can be stored, pumped and burned as a substitute for oil and gas in modified furnaces or boilers.
The valuation of Sino Clean is compelling, trading at only 2 times operating cash flow for a company with virtually no long-term debt. The company recently provided earnings guidance for 2010 projecting $10 in earnings. This puts the company at a valuation of only 4 times projected earnings.
Gross margins are nearly 40% and the company has been growing revenue by double digits. In addition, the company just began production at a new 200,000 ton facility, bringing total capacity to more than 850,000 tons.
The stock sold off after last quarter's results, when SCLX posted what appeared to be a loss. However, as can be seen from the cash flow statement, this "loss" was only due to a non-cash charge related to warrants. In fact, the company generated more than $5 million in cash for the last nine months.
A few noteworthy items give me a feeling of
with Sino Clean, where I see the company proceeding on the well trodden Chinese path of reverse splitting the stock and uplisting to the
or Amex. First, two weeks ago the company hired an exceptionally qualified English speaking, U.S. educated, GAAP-trained CFO named Wendy Fu.
Ms. Fu's background includes being CFO at two other uplisted U.S.-listed Chinese companies, as well as having worked at Deloitte & Touche. This type of hire is only necessary in advance of an uplisting.
Second, in 2009, the company retained HC International for its investor relations effort. I took a quick browse at HC International's Web site; its client list reads like a who's who of China uplistings. Various clients include
China Green Agriculture
SCLX has also been very proactive about investor outreach, and is presenting at the Rodman & Renshaw conference next week to institutional investors. This should bring a lot of new attention to the stock. If my uplisting prediction is correct and SCLX trades on a senior exchange, the stock should easily be trading on a massively different multiple and potentially provide 300%-500% upside to investors who get in before the upward move.
Written by Rick Pearson in BeijingThe author can be reached at firstname.lastname@example.org
At the time of publication, Pearson was long SCLX.OB.
Rick Pearson is a Beijing-based private investor focusing on U.S.-listed China small-cap stocks. Until 2005, Pearson was a director at Deutsche Bank, spending nine years in equity capital markets in New York, Hong Kong and London. Previously, he spent time working in venture capital in Beijing. Mr. Pearson graduated magna cum laude with a degree in finance from the University of Southern California and studied Mandarin for six years. He has frequently lived, worked and traveled in China since 1992.