China Coal Play Beginning to Cool Down

Robert Hsu, September 23, 2009

Last November proved to be a great time to pick up shares in strategic China plays, as the Chinese government's $586 billion stimulus package put in a bottom for Chinese shares. At that time, China's state-owned enterprises (SOEs) were particularly tantalizing buys given that China's government was ramping up increased support for these businesses. I expected the Chinese government to use a portion of the stimulus package to help support SOEs and keep them from collapsing in the global financial and economic crisis.

And guess what? I was right. A large portion of the funds that the Chinese government shelled out fell into the hands of many SOEs, particularly those involved in the country's infrastructure build out. So late last year was a perfect bottom-picking opportunity to invest in certain SOEs, like Yanzhou Coal (NYSE: YZC).

I had actually recommended that my China Strategy subscribers invest in the company earlier in 2008 -- and though we only sold the stock at about break-even, we avoided a 60% plunge in share prices right before commodities collapsed over the summer. But our second investment in Yanzhou Coal played out much better for us.

Coal demand simply exploded in early 2009. In fact, during the first six months of the year, China imported a record 48 million tons of coal. Along with that jump in demand due to their massive infrastructure build out, many smaller mines in China were being shut down, driving business to the bigger companies such as Yanzhou Coal.

All of this benefited our holding very nicely. China's astonishing economic growth and recovery from the global economic slowdown accelerated the country's energy demands and need for raw materials. And Yanzhou Coal shares doubled in eight months.

But China's seemingly insatiable appetite is now growing closer to being satisfied.

To further boost economic growth, China is re-opening a number of idled mines, which could further increase domestic supplies and put pressure on prices. China's coal purchases may drop by a full 33% in the second half of the year. This definitely jeopardizes the rally that we've enjoyed -- so I told my China Strategy readers I expected a curb in Yanzhou's profits.

In fact, Yanzhou expects their third-quarter net profits to fall by about 55% year-on-year due to lower coal prices. Due to these reasons, I recommended my China Strategy readers book their gains on Yanzhou Coal, locking in profits of about 100%.

Don't miss out on any of my buy and sell recommendations -- join China Strategy today!

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