China Energy   

Upside or downside

Thanks for the information. Given the increase use of alternative fuel coupled with the accelerating growth in China economy, it is no wonder Citi covered with a TP of 2.30...look forward to see this counter making the $2.00 level soon.

 

DME is a derivative of natural gas or coal that is increasingly being used as a non-renewable alternative fuel (and possibly will substitute for imported petroleum). DME can be used, stored and transported like LPG but is more cost competitive. DME is priced at a 5% discount to LPG, which is correlated to international oil prices.

 

It surged to a record $1.78, after Citigroup started coverage with a "buy" rating and a target price of $2.30, saying the firm provides unique exposure to China's energy demand.

"China Energy has about 60% of China's market for DME (dimethyl ether)," said Citigroup analysts Howard Pang and Graham Cunningham in a client note.

"We expect DME to capture 20 to 25% of China's LPG market by 2010."

DME is an alternative fuel based on clean coal technology.

 

Merrill Lynch Research

 

 

Expansion accelerated

Price S$1.61

Price Objective S$1.88 to S$2.28

? Expansion accelerated

China Energy is accelerating its DME capacity expansion by 30% to 3.2mn tpa by FY09. We view this latest development very positively, which also demonstrates management?s strong confidence in DME market growth. We raise our price objective to S$2.28 (from S$1.88) and reiterate our BUY recommendation.

DME capacity to expand 21x in three years

CEGY targets to complete its Zhangjiagang Phase II (700,000 tpa) a year ahead of schedule by end 08. It is also investing in two new DME sites (Ningbo and Tianjin), which will add another 600,000 tpa by end09. There are plans for further expansion at both sites which could lead to additional 1.4mn tpa DME capacity beyond 2009. Separately, CEGY plans to set up a procurement and marketing centre in Singapore for sourcing of methanol feedstock and potentially distribution of DME products to overseas markets such as Japan and Korea.

Additional debt to fund CAPEX

We estimate CEGY will require RMB3.3-3.6bn to fund its new plans over FY07- 09E. Based on its existing RMB1bn cash and projected cash flow generation, there could still be a funding gap of RMB1-1.5bn. Management indicated it is already in discussion with several banks to raise new debt to bridge the gap.

Price objective raised to S$2.28

We raise our FY09E earnings to RMB1.6bn (+30%) and consequently our DCF valuation to S$2.28. We understand the two new DME facilities in Shandong (250,000tpa) and Guangdong (200,000tpa) are in trial production and should be acquired by CEGY soon. Successful DME vehicle trials in China will also raise the likelihood of DME being used as a diesel substitute and benefit CEGY.

Our PO of S$2.28 is based on DCF valuation, which assumes WACC of 13% and terminal growth of 1%. This translates to a target multiple of 18xFY08E earnings, which is at PRC peers average P/E of 18x and still below Japanese alternative energy companies? forward PE of 27x. Price catalysts include favorable DME/LPG price environment leading to stronger than expected earnings and positive news flow on DME vehicle trials.

Risks are:

1. Lower than expected DME prices

2. Higher than expected Methanol costs

3. Coal supply risk

4. Execution risks related to DME capacity expansion

5. Retail consumers rejecting DME-blended LPG

6. Failure to develop new DME markets beyond 2010

7. Threat from new DME technology (based on one-step synthesis gas)

8 . Higher than expected acquisition prices from interested parties

Analyst Certification

I, Eddy Loh, CFA, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or view expressed in this research report

Price Objective Basis & Risk

24 May 2007

China Energy Ltd.

 

1 FOR IMMEDIATE RELEASE China Energy accelerates DME capacity expansion to leverage on growing energy demand in China ? Targets total production capacity of 2.6 million mtpa (?metric tons per annum?) by end 2008, ahead of initial projections ? Plans to develop new capacity in Ningbo and Tianjin to raise total production capacity to 3.2 million mtpa by end 2009 ? Plans to set up centralized procurement center and marketing center in Singapore in the near future Singapore, 24 May 2007 - China Energy Limited (?China Energy? or ?The Group? or ?中国能源有限公司? ), China?s largest producer of Dimethyl Ether (?DME?) ? an environmentallyfriendly and cost efficient alternative fuel, has announced that the Group will be accelerating their DME production capacity expansion to capitalize on the increasing demand for energy in China. By the end of 2008, China Energy intends to increase its DME production capacity to 2.6 million mtpa. This brings forward the preliminary target set during its Initial Public Offering (?IPO?) to achieve an aggregate DME production capacity of approximately 2.5 million mtpa by the end of 2009. At present, China Energy has a DME production capacity of 150,000 mtpa (in addition to a Methanol - used as a feedstock for DME - production capacity of 250,000 mtpa.) Acquisitions of the shares of Jiutai Energy (Guangzhou) Co. Ltd with a DME production capacity of 200,000 mtpa and the Phase III facilities in Shandong with a DME production capacity of 250,000 mtpa are expected to occur by the end of the first half of 2007. This will raise the Group?s total DME production capacity to 600,000 mtpa by the end of June 2007. The Phase I development of an additional 300,000 mtpa of DME production capacity at Zhangjiagang is targeted for completion by the end of 2007. Following that, a further 1.0 million mtpa of DME production capacity via the Phase II development at Jiutai Guangzhou and 700,000 mtpa of DME production capacity via the Phase II development at Zhangjiagang are expected to be completed by the end of 2008. These plans will raise the 2 overall DME production capacity to 2.6 million mtpa by the end of 2008. This is ahead of the Group?s initial projections during its IPO to expand its DME production capacity to 2.5 million mtpa by the end of 2009. On top of that, China Energy also intends to develop new DME production capacity of 1.0 million mtpa each in Ningbo and Tianjin. The Phase 1 development at Ningbo and Tianjin will add 300,000 mtpa each to the Group?s total production capacity by the end of 2009. This will effectively increase the Group?s total production capacity to 3.2 million mtpa by the end of 2009. The Group intends to fund the above expansion plans with borrowings of approximately RMB1.5 billion as well as a combination of cash reserves and recurring cash flows from operations. Currently, most of the DME produced by the Group are sold to Liquefied Petroleum Gas (?LPG?) distributors who blend it with LPG to reduce their average costs. China?s demand for LPG has been strong since 1990. According to a study by market research firm Purvin & Gertz, total LPG consumption volume rose from about 2.1 million tonnes in 1990 to about 21.1 million tonnes in 2005, translating to an average annual growth rate of approximately 17% over the period. This figure is expected to increase even further to 30.6 million tonnes in 2015 on the back of China?s increasing energy needs. In addition, DME is also seen as an increasingly attractive alternative to diesel fuel due to its environmentally-friendly chemical properties. This market too presents a huge growth potential; China alone consumed 42 million tonnes of diesel in the transportation sector in 2005 according to the study by Purvin & Gertz. ?Being the largest DME producer in China, we have the first mover advantage to benefit directly from rising DME demand, which is driven by China?s increasing energy needs and the government?s support for clean alternative fuels. We are seeing an increasing trend of DME being used as a blendstock by LPG distributors and with our patented technology ? ?Liquid Phase Compound Acid Dehydration Production Process?, we are able to produce DME with lower capital expenditure and operating costs. Moving forward, our capacity expansion will enable us to strengthen our market position and allow us to further tap this growth momentum.? - Mr Cui Lianguo (?(?(?(?崔连国国?) ?) Chairman & CEO In addition to the above capacity expansion plans, China Energy also has plans to set up a centralized procurement and marketing center in Singapore in the near future. The centralized procurement activities for raw materials will enable the Group to have more efficient utilization of manpower resources and be in a better position to secure bulk discounts from the suppliers. At the same time, the center will also be a marketing and distribution center for the Group?s DME products as an alternative energy solution globally. China Energy has recently announced its 1st quarter results for financial year 2007 with a 52% jump in revenue to RMB192.1 million and 35% rise in net profit to RMB50.4 million. This growth was attributed to increase in sales of both the Group?s Methanol and Dimethyl Ether (DME) products, which rose 20% and 137% respectively. For the full financial year of 2006, the Group reported overall revenue of RMB680.1 million and net profit of RMB191.5 million.

 

Yap, with good fundamental and growing prospects, hopefully it will reach TP of 1.75 as recommended by some of the broking house probably a month back.

 

 

TA charts look bullish for this one now.

 

As mentioned, hold steady.  Chart for everyone's info.

Good luck.

 

yeah hold quite long already finally start to cheong! hope the trend carries on!

 

It closes at a new high today on large volume.

It should continue its uptrend on Monday.

Buy when a stock just reaches its new high. 

 

 

 

 

More upside on this.  A big waste to sell now.

 

Those who persist til now get the rewards.... give yourself three cheers and party..me cashing out now...

 

ChinaEnergy looks good today.. still going upwards..

 

ChinaEnergy and Ouhua cheong together ?

 

sorry, double posting of my previous post. I'll like to delete but don't know how.

this post was in another china energy thread

 

China Energy resembles a cup and handle pattern.

See here for more analysis.

 

up and down...down and up....hope the chinese cool down and resume the normal trade.

 

If look carefully, lots of china counters are affected as there are much rumors about china raising its interest rate during this period. Also, lots of analysts are warning of correction in may. Most players cashed out not to get caught in sudden plunge.


 

 

 

kilroy, u are right. things didn't look good. 27 apr cut thru' my 1st TL. i had thought today may bounce back to going above it. have sold off this morning. take profits and run first in case anything happen :p

 

Looking at 1.23 for the first physiological support. 1.17 next. CCI shows plenty of room to extend southward. ADX uptrend weakening.