CHGY DD
China Energy Corporation
(OTC BB: CHGY)
Ticker: CHGY.OB
Fiscal Year End: November
Sector: Coal Mining
Recent Price: $0.82
12 Month Target Price: $4.0
Market Cap: $36.90 million
52-Week High: 0.925
52-Week Low: 0.038
Price/Earnings (TTM): 12.0
Price/Book (MRQ): 1.5
Price/Sale (TTM): 2.0
Share Outstanding: 45.0 million
Float: 3.65 million
AVG Daily Volume (3 MOS):71589
Insider Ownership: 91%
CEO: Ding WengXiang
1. Company Overview:
China Energy Corporation (CHGY) was incorporated in the state of Nevada on October 11, 2002. CHGY produces coal through the subsidiary Inner Mongolia Tehong Coal Group Co, Ltd. (“Coal Group”) and supply heating and electricity requirements throughout the XueJiaWan district through our subsidiary Inner Mongolia Zhunger Heat Power Co., Ltd. (“Heat Power”). CHGY acquired these two subsidiaries on November 30, 2004.
The Inner Mongolia Tehong Coal and Electricity Group Co., Ltd. is headquartered in Hohhot City, the capital of Inner Mongolia. Tehong Group was named as one of “2008 Top 100 China Coal Enterprises” by China Coal Machinery Associate. It produces coal from the LaiYeGou coal mine located in Erdos City, Inner Mongolia, People’s Republic of China (“PRC”). Coal Group’s trade consists of production and processing and distributing of raw coal for domestic heating, electrical generation and coking purposes for subsequent steel production.
Coal Group invested in infrastructure improvements necessary for increasing annual production capability of the LaiYeGou Coal Mine to 800,000 tons per year. Infrastructure improvements commenced in May 2006 and were recently completed early July 2009. The cost of the expansion is approximately $ 10 million and was financed through shareholder and bank loans.
Coal Group has the capability of producing 800,000 tons of coal per year. The current coal price is $80 US per ton. At full operation, it will generate $64 million USD annually and estimated net income after tax of $31 million USD. CHGY's LaiYeGou Coal Mine has a proven and probable reserve of 26 million tons and 80% recovery factor. The coal mine life is about 26 years at the current production capacity of 800,000 tons annually.
The raw coal produced is non caking coal and has a high ash melting point with high thermal value used almost exclusively as fuel for steam-electric power generation. It has low sulphur and low chemical emission which satisfies government environmental protection standards with heating capability of 6,800 -7,000 Kilocalories (“Kcal”).
2. Catalyst and Valuation
CHGY had basically closed her LaiYeGou coal mine in the previous 12 months in order to install new production equipment and expand production capacity from 500,000 tons to 800,000 tons. Because the main tunnels to the coal mine was closed for the production expansion purpose, CHGY only produced coal at 5% of the expanded production capacity in the previous 12 months. Revenue and net income in the previous 12 months only came from their heat/power group as well as 5% coal production capacity. They did not represent the true earning power of CHGY.
The coal mine was re-opened early July 2009 and was expected to ramp up to full production before the end of August 2009. Going forward, at full production, CHGY will produce 800,000 tons of coal at full operation. The current coal price for CHGY is $80 USD per ton. If coal price remains at the current level of $80 USD per ton, CHGY will generate $64 million USD revenue and estimated after tax net income of $31 million USD annually. This is estimated forward PE=1. CHGY will also generate about $7 million US revenue from their heat/power group. The estimated forward revenue and earning for CHGY based on the expanded production capacity of 800,000 tons annually and the current coal price of $80 USD per ton are listed below:
Total revenue: $71 million USD (revenue from coal group, $64 m and revenue from heat/power, $7 m).
Cost of Revnue or Good Sold: $16 million USD
Gross Profit: $55 million USD
SG & A Cost: $3 million USD
Operating Profit: $52 million USD
Interest Expense: $1 million USD
Income Before Tax: $51 million USD
Tax (25% tax rate): $12.75 million USD
Net Income: $38.25 million USD
Earning per share: $0.85 using 45 million total share count
Earning per share: $0.77 using 50 million total share count.
Allowing 10% margin error, earning per share will be around 0.69 - 0.77 per share.
After 12 months' operation at full capacity, CHGY may earn around 70 cents per share. At P/E multiple of 6, the potential share price of $4.
3. Investment Highlights
Coal is the most important energy source of China and it provides more than 70% energy source for the country. China will need coal to drive her economy grow in the next 20 years. Coal price, like crude price, will continue in a uptrend long term and thus has a clear long term visibility.
