Sinocoking Coal & Coke (NASDAQ:SCOK)

Rodman and Renshaw on SCOK                                                  2/22/2011

F2Q11 Review  

SinoCoking Coal and Coke Chemical Industries (“SinoCoking,” Ticker: SCOK, Market Perform) reported its F2Q11 financial results. Total revenue for the quarter was $16.7million, up 13.4% YoY, but below our estimate of $18.4 million. Operating income came in at $6.3 million, up 10.7% YoY, beating our estimate of $3.3 million. Non-GAAP net income for the quarter (excluding change in fair value of warrants) was $4.5 million, or $0.21 per diluted share, beating our respective estimates of $2.1 million and $0.10. As of December 31, 2010, the company had $32.6 million of cash and restricted cash.

F2Q11 Financial and Operation Highlights 

During the quarter, SinoCoking booked $9.5 million of revenue from its coke products, slightly higher than our expectation of $9.1 million. The performance of the coal products segment was a disappointment however. With an actual revenue figure of $7.2 million, it was clearly below our estimate of $9.3 million. The company cited a relative lack of coal supply from Zhengzhou Coal Group (due to overall industry coal shortage) as a major reason for this shortfall. That being said, the overall top line miss was more than compensated by the higher than expected gross profit of $7.1 million, above our estimate of $5.1 million. Actual gross margin, as a result, reached 42.5%, well above our expectation of 27.9%. Operating expenses also came in lower than expected. Selling expenses during the quarter were merely $71,447, less than half of our estimate of $0.2 million. G&A expenses came in at $0.7 million, also below our previous projection of $1.7 million. These were the major contributing factors to the much better than expected bottom line results. 

SinoCoking indicated that the construction of its new coking facility is moving ahead and, when completed, can bring the company’s total annual coking capacity to 1.1 million MT. It also announced that its cost estimate for the construction has been reduced by $10 million to $60 million. 

According to the company, on December 30, 2010, SinoCoking set up Henan Zhonghong Energy Investment Co., Ltd. (“Zhonghong”), a limited liability company for the purpose of engaging in coal mine acquisitions pursuant to a planned joint-venture with Henan Province Coal Seam Gas Development and Utilization Co. (“Henan Coal Seam Gas”), a state-owned enterprise. We believe the forming of Zhonghong was in anticipation of the government’s consolidation plan which requires smaller mining companies to reach one-million metric tons (MT) of aggregate annual production capacity threshold by the end of March 2011 in order to continue operation. In our opinion, through Zhonghong, SinoCoking could form joint-ventures with the larger state-owned enterprise that could bring in existing capacity well above the one-million MT threshold, thus enabling SinoCoking to satisfy the government consolidation requirement. That being said, the company, in its earnings press release and conference call, indicated that it planned to complete various coal mine acquisitions so it would reach the one-million MT capacity requirement on its own before March 31. We certainly hope this will become a reality.


Notice Regarding Privacy and Confidentiality:

This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

Since Rodman & Renshaw, LLC is not a tax advisor, transactions requiring tax consideration should be reviewed carefully with your tax advisor. Similarly, Rodman & Renshaw, LLC is not a law firm and provides no legal opinions or legal advice.

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Rodman & Renshaw, LLC and/or its officers or employees may have positions in any of the securities of this (these) issuer(s).

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Rodman & Renshaw on SCOK

F1Q11 results update 

SinoCoking Coal and Coke Chemical Industries (“SinoCoking”, Ticker: SCOK, Market Perform) announced its fiscal 1Q11 results that missed our revenue estimate but beat our bottom line projection. Revenue for the quarter was $13.0 million, below our estimate of $14.4 million. Gross profit was $4.6 million, well above our estimate of $2.2 million. Adjusted net income was $2.6 million, above our estimate of $0.7 million. This translates to non-GAAP EPS of $0.12 for the quarter, exceeding our expectation of $0.03. At the end of the quarter, SinoCoking had $6.2 million of cash and $27.5 million of restricted cash.

Operation update

The above-expectation bottom line performance was due in large part to the almost across-the-board increase in coal product prices during the quarter. A combination of factors that included an expected cold winter, the ongoing government coal industry consolidation that limited coal production output, and the fact that China has been entering a more inflationary environment in general, contributed to the coal price increase. We believe the trend of high coal product prices will continue in the foreseeable future. The company also increased its coke production during the quarter to meet increasing demand. The construction of its new 900K-capacity coking facility is ongoing and the target completion date is in March 2011. When completed, the new plant could generate $100-$110 million of annual revenue and $20-$25 million of net income. In July, SinoCoking announced two coal mine acquisitions with a combined annual production capacity of 300,000 MT. According to management, the company is in active discussions with 20 potential mining company targets. It currently plans to complete four more acquisitions before the end of March, and nine in total by the end of F2011. SinoCoking announced in September that it entered into a long term agreement with state-owned Zhengyun Coal to purchase up to 3 million MT of raw and washed coal per year. The agreement not only could secure sufficient coal for SinoCoking’s coking production, but also allowed the company to generate trading revenue using the purchased coal. We thus expect SinoCoking will start to generate trading revenue as early as in F2Q11.

Adjusting estimates and maintaining Market Perform rating 

In light of the quarterly report, we are adjusting our financial projections for SinoCoking. We now expect the company will report FY2011 revenue of $108.4 million, up 83.6% from FY2010, and gross profit of $35.1 million in FY2011, up 56.4% from FY2010. We estimate non-GAAP net income will reach $16.0 million in FY2011, translating to non-GAAP EPS of $0.75. We are maintaining our Market Perform rating on the shares of SinoCoking. We believe the company enjoys a very supportive market environment accentuated by significant increase in coal product prices, however we also acknowledge the near term uncertainty with regard to its coal mine moratorium and acquisition progress. We expect much greater clarity on the company’s business future by the end of next March as it represents the deadline for the company to reach the government mandate of 1 million-MT annual coal production capacity threshold. 

Notice Regarding Privacy and Confidentiality:

This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

Since Rodman & Renshaw, LLC is not a tax advisor, transactions requiring tax consideration should be reviewed carefully with your tax advisor. Similarly, Rodman & Renshaw, LLC is not a law firm and provides no legal opinions or legal advice.

Rodman & Renshaw, LLC may make a market in the securities being discussed.

Rodman & Renshaw, LLC and/or its officers or employees may have positions in any of the securities of this (these) issuer(s).

Member FINRA.
Member SIPC.

Rodman & renshaw on Sinocoking Coal & Coke

F4Q10 results update SinoCoking Coal and Coke Chemical Industries (“SinoCoking”, Ticker: SCOK, Market Perform) announced its fiscal 4Q10 results earlier today. Revenue was $10.9 million, somewhat higher than the company’s guidance of $10 million and our estimate of $10.2 million. Gross profit was $1.7 million, below our estimate of $3.8 million, mostly due to lower coke prices and higher costs for coal purchased from third parties. Adjusted net income was $0.6 million, well below the company’s late-August guidance of $2 million and our estimate of $2.1 million. This also translates to non-GAAP EPS of $0.03 for the quarter, below our expectation of $0.09. 

New FY2011 guidance SinoCoking also provided guidance for its fiscal year 2011. Management now expects the company will generate $114.9 million of revenue and $16.8 million of pro forma net income for the year, assuming the new 900,000-metric ton coking facility will commence production in June 2011 and average 60% capacity utilization in F4Q11. It also assumes the company would complete additional mining operations, adding at least 600,000 tons of annual capacity, and all the mines could resume full production by March 31, 2011. 

Operation update With regard to the moratorium on the production of its Baofeng mine, SinoCoking now indicates that it was shut down, together with all other mines with annual production capacities between 150,000 and 300,000 metric tons, due to Henan provincial authorities’ consolidation plan. Under the consolidation plan, mining companies need to reach one million metric tons of aggregate annual production capacity thresholds by the end of March 2011 in order to resume operations. Management has expressed optimism regarding its prospect of reaching such a goal. SinoCoking also announced in September that it signed a long term agreement with Zhenyun Coal Distribution Co. to purchase 3 million metric tons of raw and washed coal per year. The company can utilize this purchased coal for its processing, coking, and trading operations. 

Adjusting estimates and maintaining Market Perform rating In light of the new guidance, we are adjusting our financial projections for SinoCoking. We now expect the company will report FY2011 revenue of $126.3 million, up 113.9% from FY2010. Gross profit, in our model, will reach $33.8 in FY2011, up 50.7% from FY2010. We also estimate non-GAAP net income will reach $16.4 million, or $0.74 per diluted share in FY2011. We are maintaining our Market Perform rating on the shares of SinoCoking. While we believe the company remains a growth story when considering its coal mine acquisition strategy and its new coking capacity expansion, we acknowledge the near term uncertainty with regard to its coal mine moratorium and acquisitions. 

Risks include 1) the uncertainty regarding whether or when the current moratorium will be lifted; 2) dependence on cyclical coal and coke markets; 3) operations dependent on ability to continue acquiring or developing suitable coal mines; 4) uncertainty of capital availability; 5) operation risks inherent to coal mining; 6) safety incident risks; 7) extensive government regulation; and 8) customer concentration risks.

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Rodman & Renshaw, LLC reserves the right to monitor and review the content of all e-mail communications sent and/or received by its employees.

This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

Since Rodman & Renshaw, LLC is not a tax advisor, transactions requiring tax consideration should be reviewed carefully with your tax advisor. Similarly, Rodman & Renshaw, LLC is not a law firm and provides no legal opinions or legal advice.

Rodman & Renshaw, LLC may make a market in the securities being discussed.

Rodman & Renshaw, LLC and/or its officers or employees may have positions in any of the securities of this (these) issuer(s).

Member FINRA.
Member SIPC.

Courtesy of Rodman & Renshaw; More Color regarding the GeoTeam's breaking alert on SCOK @ $13.00 yesterday afternoon: (The stock closed the day at $11.62)

SinoCoking Coal and Coke Chemical Industries announced yesterday an operation ban on its coal mining operations by the government. This was due to couple mining incidents involving some privately-held mining companies in Pingdingshan, the city in which SincoCoking is also located.

Based on the information available to us, we are certain that the incidents did not involve SinoCoking. However, all coal mining operations in Pingdingshan have been shut down, including 100% of SinoCoking’s OFFICIAL mining activities. It is now anybody’s guess when the government will lift the ban. Based on our experience and estimate, we do not expect the ban will be lifted in any immediate future, such as a week or two. In fact, we will not be surprised if the ban lasts for more than 2-3 quarters. We also do not anticipate the company will generate any coal mining revenue during the entire period of the ban.

That being said, based on our information, not all the company’s UNOFFICIAL coal mining activities have stopped. SinoCoking has maintained and will continue to maintain some of its mining activities until it is told otherwise. While these unofficial mining operations cannot be reflected in revenue, we believe they could be used to support the company’s coking production, which is still ongoing. Regardless, we anticipate SinoCoking’s FY11 financial performance will fall dramatically short of our previous estimates.

Maintain Market Perform rating At this time, we choose to wait for greater details and clearer guidance from the company and the government before we can update our financial model. We are maintaining our Market Perform rating on the shares of SinoCoking.

Major risks include 1) dependence on cyclical coal and coke markets; 2) operations dependent on ability to continue acquiring or developing suitable coal mines; 3) uncertainty of capital availability; 4) operation risks inherent to coal mining; 5) safety incident risks; 6) extensive government regulation; and 7) customer concentration risks.