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On Friday, BofA Securities adjusted its stance on Daqin Railway Co Ltd (601006:CH), moving from a "Buy" to a "Neutral" rating. The firm also set a new price target of RMB6.50 for the company’s shares. The downgrade is attributed to several factors impacting Daqin Railway’s business, including the decreasing market share of thermal energy due to the rise of wind and solar alternatives. This shift is causing a decline in demand for soft coal, which is a significant revenue source for Daqin Railway, despite the company having long-term contracts in place.
The analyst at BofA Securities noted additional challenges for Daqin Railway, such as the downward pressure on shipping prices during industry downcycles and high operating costs that are not favorable in a low-growth environment. The report also mentioned the negative impact on return on equity (ROE) due to convertible bond (CB) dilution.
Despite these concerns, BofA Securities acknowledged some positive factors that could support Daqin Railway’s stock. These include the fact that long-term contracts still account for 80% of the company’s volume and that production in Shanxi is recovering following safety checks. Moreover, Daqin Railway boasts the strongest shareholder returns in the sector, has completed the redemption of its convertible bonds, and its fair value is set at 2 standard deviations below its recent historical average. These elements could provide some balance to the challenges faced by the company.
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