Company Report

PHILIPPINE EQUITY RESEARCH

Semirara Mining Corp: Transforming into a power play

Initiating Coverage
30 SEPTEMBER 2010

SHARE DATA We are initiating our coverage on Semirara Mining Corp. with a BUY recommendation and FV estimate of
Rating BUY Php196/sh based on the DCF method. Semirara is a spectacular growth company. The Company’s profitability
Ticker SCC will greatly improve following its transformation from a pure coal miner to a vertically-integrated power
Price Target (Php) 196.00
generation company. Semirara will also be in a position to capitalize on the tight power supply and demand
Current Price (Php) 130.20
in Luzon.
Upside (%) 50.54

Shift to power generation will enhance profitability. Semirara’s profitability will greatly improve
following its transformation from a pure coal miner to a vertically-integrated power generation
company. Power generation companies have higher operating margins and are better leveraged
ABSOLUTE PERFORMANCE (%) than coal miners. We forecast ROE to improve significantly from 18.4% when it was a pure coal
1M 3M YTD miner in FY09 to 28.5% when the Calaca plant will be fully operational in FY12.
SCC 3.33 53.18 143.57
PSEi 14.97 21.57 34.31
Vertical integration a key advantage over competitors. Semirara’s profitability can exceed other
local power producers given the vertical integration of its Calaca plant with existing coal mining
operations. The Calaca plant sources coal from Semirara’s existing mining operations such that its
fuel cost is 10% lower than that of its peers. Because of this, we believe there is minimal risk to our
long-term utilization assumption of 70%.

Significant expansion opportunity in Luzon. The power industry also offers plenty of room for
expansion given the looming power supply shortage in Luzon. Semirara is set to capitalize on the
MARKET DATA (Php) lack of power supply in Luzon by increasing its power generating capacity from 340MW in FY09 to
Market Cap 46,383.75 Mil 1,070MW by 2013. This will be achieved through the rehabilitation of its existing Calaca plant and
Outstanding Shares 277.57 Mil the construction of a brownfield project.
52 Wk Range (Php) 36.45-145.00
3 Mo Ave Daily T/O 74.75 Mil Recommending BUY. We have a BUY recommendation on SCC with a FV estimate of Php196/sh.
We believe there is significant upside risk to its current price as the market overlooks the potential
value of the brownfield project. We believe three catalysts that will unlock the company’s huge
potential be: 1) positive developments in its brownfield project, 2) better than expected capacity
of the existing Calaca plant, and 3) higher than expected WESM prices.

FORECAST SUMMARY
Year to Dec. 31 2009 2010 2011 2012 2013
Sales 11,944 24,617 24,861 26,404 47,790
% change y/y 40.7 106.1 1.0 6.2 81.0
EBIT 1,832 4,435 7,011 7,765 16,248
% change y/y 68.4 142.1 58.1 10.8 109.2
EBIT Margin (%) 15.3 18.0 28.2 29.4 34.0
EBITDA 2,973 6,523 9,313 10,177 20,081
% change y/y 32.3 119.4 42.8 9.3 97.3
EBITDA Margin (%) 24.9 26.5 37.5 38.5 42.0
Net Profits 1,810 3,556 6,131 6,886 9,561
% change y/y 127.2 96.5 72.4 12.3 38.8
NPM (%) 15.2 14.4 24.7 26.1 20.0
EPS (cents) 6.52 9.98 17.21 19.33 26.84
% change y/y 127.2 53.1 72.4 12.3 38.8

RELATIVE VALUE
P/E(X) 20.0 13.0 7.6 6.7 4.9
RESEARCH CONTACT P/BV(X) 3.7 3.2 2.4 1.9 1.3
ROE(%) 18.4 24.5 32.3 28.5 27.5
Paul Jeffrey Lu
Dividend yield(%) 4.6 4.6 4.6 4.6 4.6
paul.lu@citiseconline.com *Source: CitisecOnline estimates
 30 SEPTEMBER 2010

Initiating coverage with a BUY rating and FV Exhibit 2: SCC Earnings Contribution Forecast

estimate of Php196/sh 100% 0.0%

80% 38.5%
We are initiating our coverage on Semirara Mining Corp. with a BUY
66.2%
recommendation and FV estimate of Php196/sh based on the DCF 60%
71.0%
79.5%
method. Semirara is a spectacular growth company as its entry into 100.0%
the lucrative power industry will pave the way for earnings to grow 40%
by a 4-year CAGR of 51.6% from Php1.8Bil in FY09 to Php9.6Bil in 61.5%
FY13. The Company’s profitability will greatly improve following 20% 33.8%
its transformation from a pure coal miner to a vertically-integrated 29.0%
20.5%
power generation company. As a power company, Semirara will be 0%
in a position to capitalize on the tight power supply and demand 2009 2010E 2011E 2012E 2013E
in Luzon.
Mining Power
Exhibit 1: SCC FY09 to FY13 Earnings
Source: SCC, COL estimates
10,000

8,000 Shift to power generation will enhance

profitability
6,000
Semirara’s profitability will greatly improve following its
4,000 transformation from a pure coal miner to a vertically-integrated
power generation company. In the Philippines, power generation
is much more lucrative than coal mining. Power generation
2,000
companies have operating margins that are significantly better
than coal miners as electricity generation is higher in the value
0 chain. Power generation companies are also better leveraged than
FY09 FY10E FY11E FY12E FY13E coal miners as earnings tend to be less volatile.
Source: SCC, COL estimates
The superior profitability of power generation companies is evident
regionally, and much more domestically. Regionally, vertically-
Company background integrated power generation setups have proven to be superior
as their return on equity (ROE) is 5 percentage points better than
Semirara Mining Corp. is a vertically-integrated power generation pure coal miners. Domestically, the spread in ROE is even higher at
company, engaged in both coal mining and power generation. 7 percentage points given the high electricity prices caused by the
The company owns the right to mine the coal resources of tight power supply and demand situation in Luzon.
Semirara Island in Caluya, Antique, until July 14, 2027, through its
Exhibit 3: Power vs. Coal Producer
Coal Operating Contract with the Department of Energy (DOE).
Management estimates that coal mining capacity is at 6Mil Metric Power producer ROE (%) Operating Margin (%) D/E
Tons (MT) annually. China Shenhua Energy Company 20.4% 41.8% 0.43
Aboitiz Power Corp. 28.4% 38.6% 1.97
In December 2009, Semirara evolved into a vertically-integrated Energy Development Corp. 21.0% 42.1% 1.65
Average 23.3% 40.8% 1.35
power generation company following its acquisition of the Calaca
Coal producer ROE (%) Operating Margin (%) D/E
coal-fired plant. From having only 340MW in FY09, the Calaca
China Coal Energy Company Ltd. 13.9% 22.7% 0.19
plant will have an effective capacity of 470MW once rehabilitation
Yanzhou Coal Mining Co. 16.7% 31.0% 0.76
is completed next year. Management is also planning to build a Semirara Mining Corp. 18.4% 15.3% 0.12
600MW coal-fired plant by 2013. With its new focus in the power Average 16.3% 23.0% 0.36
industry, we expect the power generation business to account for
Source: COL estimates; Company Data
80% of total profits in FY13.

Please see the Important Disclosures Section and Ratings Key at the end of this report. SCC/Inititating Coverage/ page 2
 30 SEPTEMBER 2010

Given Semirara’s entry into the more lucrative power industry, Exhibit 5: Luzon Grid Situation
14,000
we forecast ROE to improve significantly from 18.4% when it was
a pure coal miner in FY09 to 28.5% when the Calaca plant will be 13,000

fully operational in FY12. During its first year of operating the Calaca 12,000

plant, we already forecast ROE to improve to 24.5%. 11,000

10,000
Vertical integration is a key advantage over 9,000
competitors 8,000

7,000
Semirara’s profitability can exceed other local power producers 6,000
given the vertical integration of its Calaca plant with existing coal 5,000
mining operations. The Calaca plant sources coal from Semirara’s 2009 2010 2011 2012 2013 2014 2015 2016
existing mining operations such that its fuel cost is 10% lower than
that of its peers. Semriara’s vertically integrated nature also protects Existing Capacity Committed Capacity

its power business from the threat of high coal prices. Pure power Indicative Capacity Peak Demand+Required Reserve Margin
Source: DOE
producers are vulnerable to margin squeeze should coal prices
increase. However, the fuel costs of vertically-integrated power
generation companies are flat regardless of the movement in coal Semirara is set to capitalize on the lack of power supply in Luzon.
prices. It plans to increase its power generating capacity from 340MW in
FY09 to 1,070MW by 2013. The Company is already rehabilitating
Semirara plans to use this advantage to optimize the utilization of its the Calaca plant to increase its capacity by at least 38.2% to 470MW.
plants. Management said it can reduce the selling price to improve The rehabilitation is expected to cost US$120Mil and should be
its competitiveness in the market. Because of this, we believe there completed by February 2011. Meanwhile the Company is also
is minimal risk to our long-term utilization assumption of 70%. undertaking a feasibility study to put up a 600MW coal-fired plant
near the existing Calaca plant. Should plans push through, the
Exhibit 4: Calaca Plant Key Assumptions brownfield project is estimated to cost US$800Mil and should be
completed in 2013.
FY10 FY11 FY12
Effective Capacity 340MW 470MW 470MW
Exhibit 6: SCC Power Generation Capacity
Average Utilization 34% 63% 70%
1,200
Contracted Price Php4.80/KWh Php4.80/KWh Php4.80/KWh
WESM Price Php6.40/KWh Php5.00/KWh Php5.00/KWh
1,000
Source: COL estimates

800

Significant expansion opportunity in Luzon 600

The power industry also offers plenty of room for expansion given 400
the looming power supply shortage in Luzon. According to the DOE,
capacity in the Luzon grid may not meet the demand and reserve 200
margin requirement in 2011. With the 650MW Malaya Oil Thermal
plant scheduled for retirement in 2011, dependable capacity 0
will decrease by 6.5% to 9,380MW, leaving the system in need of FY10E FY11E FY12E FY13E
300MW in terms of peaking capacity. In the next 20 years, the supply
Source: SCC, COL estimates
situation could remain tight as the Luzon grid requires 12,500MW
of additional capacity. Currently, only 600MW of additional capacity
(to be completed by 4Q12) has been committed.

SCC/Inititating Coverage/ page 3

 30 SEPTEMBER 2010

The additional capacity from the rehabilitation and expansion plans Exhibit 9: Sensitivity Matrix for Existing Operations
will be the main driver for future earnings growth. The 130MW 470MW 490MW 510MW 530MW 550MW
additional capacity from the rehabilitation plans (and the full-year 4.00/KWh 131.10 136.31 141.52 146.73 151.93
operation of the Calaca plant) will boost the power segment’s 4.50/KWh 141.10 146.74 152.37 158.00 163.63
earnings by a 2-year CAGR of 89.1% to Php4.9Bil in FY12. Meanwhile, 5.00/KWh 151.10 157.16 163.22 169.27 175.33
the 600MW capacity of the brownfield project should add another 5.50/KWh 161.10 167.58 174.07 180.55 187.03
Php2.7Bil to earnings in FY13. 6.00/KWh 171.10 178.00 184.91 191.82 198.73
Source: COL estimates
Exhibit 7: Calaca Expansion Key Assumptions
FY13 Semirara’s huge upside from the current market price will stem
Effective Capacity 600MW from the value of the brownfield project. We believe there is a
Estimated Cost US$800Mil strong likelihood that the brownfield project will push through.
Ownership 50% First, additional power generation capacity will further increase
Average Utilization 85% the value of its coal resources. The tight power supply and demand
Contracted Price Php4.80/KWh situation in Luzon also makes the project an even more attractive
Source: COL estimates investment. Second, management is already in talks with Meralco
and Marubeni, which are expected to be strategic partners for the
project. Meralco will provide a willing taker for the generated power
Significant upside potential from the current while Marubeni will provide lower cost of financing the project.
market price Finally, Semirara can fund the project. Even by itself, the Company
is projected to generate Php9Bil operating cash flow from existing
Our FV estimate on Semirara is Php196/sh based on the DCF operations annually and has a low debt-to-equity ratio of only 0.8X.
method. This estimate can be broken down to Php151/sh for
existing operations and Php45/sh for the brownfield project. There
is minimal risk to investors given that the current market price only Recommending a BUY
reflects the value of Semirara’s existing operations. Meanwhile,
there is significant upside risk as the market overlooks the potential Our initiating coverage on Semirara calls for a BUY recommendation
value of the brownfield project. and an FV estimate of Php196/sh. Semirara’s transformation from
a pure coal miner to a vertically-integrated power generation
Our FV estimate for existing operations is conservative. At Php151/ company and its aggressive expansion plan will fuel rapid
sh, existing operations would only be valued at 8.8X FY11 P/E. earnings growth until FY13. We believe three catalysts will unlock
Despite its advantage of being a vertically-integrated power the Company’s huge potential: 1) positive developments in its
producer, Semriara is being valued lower than the 12.6X FY11 P/E brownfield project, 2) better-than-expected capacity of the existing
of local and regional peers. Furthermore, we used conservative Calaca plant, and 3) higher-than-expected WESM prices.
assumptions to value the existing Calaca plant. Our average selling
price assumption of Php5.00/KWh is much lower than the Php5.50/
KWh blended rate in 1H10. Our assumed 470MW capacity after
rehabilitation is also at the lower end of management’s guidance
of 470MW to 550MW.

Exhibit 8: Local and Regional Peers

FY11 P/E FY11 EPS Growth
Energy Development Corp. 14.1 -12.4%
Aboitiz Power Corp. 8.1 -10.5%
China Resources Power Holdings 11.8 18.5%
China Power International Development 12.6 37.3%
Huaneng Power International Inc 13.4 11.0%
Datang International Power Generation Co. 15.9 36.8%
Average 12.6 13.5%
Semirara Mining Corp. 8.8 72.4%
Source: Bloomberg; COL estimates

SCC/Inititating Coverage/ page 4

 30 SEPTEMBER 2010

INVESTMENT RATING DEFINITIONS

BUY HOLD SELL

Over the next six to twelve Over the next six to twelve Over the next six to twelve
months, we expect the share months, we expect the share months, we expect the share
price to increase by 15% or price move within a range of price to decline by more
more. +/- 15%. than 15%.

TOP PICK DEFINITION

A stock that is included in our “Top Pick” list has to meet the following criteria: 1.) It must belong to a sector with neutral to positive outlook; 2.) It must
have double digit earnings growth for the current and the succeeding fiscal year; 3.) Its share price appreciation potential must be above 15% as of the
date it was included in the list; and 4.) It must have an upward intermediate term trend.

IMPORTANT DISCLAIMERS
Securities recommended, offered or sold by CitisecOnline are subject to investment risks, including the possible loss of the principal amount invested.
Although information has been obtained from and is based upon sources we believe to be reliable, we do not guarantee its accuracy and it may be
incomplete or condensed. All opinions and estimates constitute the judgment of CitisecOnline’s Equity Research Department as of the date of the report
and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation for the purchase or
sale of a security. CitisecOnline and/or its employees not involved in the preparation of this report may have investments in securities or derivatives of
securities of companies mentioned in this report, and may trade them in ways different from those discussed in this report.

2401-B East Tower, Philippine Stock Exchange Center Exchange Road, Ortigas Center, Pasig City 1605 Philippines
Voice: +632 636 54 11 to 20 Fax: +632 635 4632 Internet: http://www.citiseconline.com

SCC/Inititating Coverage/ page 5