Goldman Sachs ASEAN:Metals and Mining:Coal

Easing supply offset by higher oil price;Sell (CL)SAR;Buy Adaro

Thermal coal supply easing as expected...
Thermal coal supply has been easing in key exporting nations (Indonesia and Australia),which is in line with our expectations.Meanwhile,China ’s coal inventory is at a historical high.We continue to expect the thermal coal market to ease on various supply-side improvements which are currently in progress (35%capacity expansion in Indonesia by end 2010E, ramp-up of new NCIG coal terminal in Australia over 2010E-2012E).

...but mitigated by rising oil price view;remain neutral
Historically,coal prices have been more correlated (88%correlation)to oil than its own supply-demand (-27%correlation).As such,we think that despite easing supply,coal prices may still inch higher next year due to our rising oil prices view,but may lag the oil rally.We retain our neutral sector view and remain stock selective.

Updating coal prices for WTI revisions;revising earnings,TPs
Despite recent reduction in our global Oils team ’ s WTI price forecasts for 2010E/11E,we maintain our US$95/100 per ton coal price forecasts.This implies declining 2010E/11E coal-to-oil ratio of 24%/21%(vs.current and YTD average of 26%),which is consistent with our view of rising supply. Meanwhile we are raising our 2012E coal price by 5%on higher oil prices. We lower our 12-m TPs by up to 17%,as we adjust our 2010E-12E NP estimates by -10%to +6%and update our Director ’s Cut valuation plot.

Downgrade SAR to Sell (CL);Buy Adaro;Banpu,ITMG to Neutral
We downgrade SAR to Sell (Conv Sell)from Neutral,given stock outperformance relative to sector peers and our belief that the market is too optimistic on its growth potential.Our new 2010E-11E net profit estimates are 6%-38%below Bloomberg consensus,mainly on higher cost/lower production volume forecasts.Adaro remains our top pick in the sector on strong earnings growth (2009-12E net profit CAGR of 21%),rising CROCI over 2010E-12E (38%to 46%),and attractive valuations.We upgrade Banpu to Neutral (from Sell)and downgrade ITMG to Neutral (from Buy),reflecting limited upside to our new target prices.With this report,Nikhil Bhandari is assuming primary coverage of the ASEAN coal sector from Patrick Tiah.

Key risks
Lower than expected oil prices or lower than expected Chinese demand.