Coal is the dominant energy source for generating electricity in China, with Coal-fired power plants account for nearly three quarters of electricity produced in China, and the most intense demand is along the coast in Eastern Chinese provinces.  This confluence of dynamics has worked out pretty well for Zouchen-based Yanzhou Coal Mining Company Ltd. (nyse:YZC), the dominant producer back east that operates its own rail transport network connecting mines and big buyers. It also sells some of the power that it generates mostly for its own.  In 2009, the company generated 29% of its revenue from selling steam coal to power plants, and 10% from sales of coking and pulverized coal that feeds the blast furnaces at steel mills and other metallurgical operations. The great global recession took its toll on revenue in 2009, with sales down 18.7% despite a slight increase in volume from 2008.  Pricing picked back up as the global economy recovered. Yanzhou indicates in its latest SEC filing June 29 that it has contracts to sell 50 tons of coal at an average selling price 17.6% higher than it received on the 80 million tons of total coal it sold in 2009. For the quarter ended March 31, 2010, revenue was up 59% and earnings jumped 153%. In the trailing twelve months, the company earned $777 on sales of $3.56 billion.  The boost in business may sound like good news, but the market has reacted quite harshly to anything cyclical and commodity related in the past two months in which Yanzhou has lost one-third of its market value. Its NYSE-listed ADRs dropped from $28 down below $19 and slipping below their 200-day moving average.  Yanzhou trades for 12.7 times depressed trailing earnings and it is deeply oversold--perhaps not for long once investors recognize the reality of double-digit Chinese GDP growth and award a higher multiple. In fact, the stock has gained 6% this week as it’s bounced off of lows.  One favorable thing that can be said for the technical picture of YZC is that prices managed to hold the $18 February low. Also, while a trip below the 200-day average is never a heartwarming occurrence from a technician’s perspective, it’s also worth noting that the last two times YZC plunged this deeply into oversold territory in late January/early February and back in October, the stock subsequently rallied to new recovery highs.  Chinese economic growth is not slacking and the country needs lots of coal to keep its economic engine humming. Counter the rampant pessimism with a position in the cheaply priced YZC shares.  Gold stocks have much higher to go if this bull market takes gold to $2,200. Which should you buy now? Goldcorp? Barrick? A junior miner? Click here for instant access to Professional Timing Service.  Click here to sign up to receive the Stock of the Week next Monday morning.
The stock got trashed in the big correction since May but the fundamentals suggest that a depressed share price is only temporary.