South East Asia Coal Sector - Time for stock picking - Credit Suisse

● With CS’s view that coal prices will be capped in a tight range this year, we expect the share prices of coal stocks to be driven by a combination of three factors: 1) cost inflation due mainly to rising oil prices, 2) ASP momentum, and 3) share price valuation.

● CS’s global mining team believes that the thermal coal market will experience supply headwinds coming from gas markets, which will cap the price upside above US$130-133/t this year. We are also witnessing near-term pushback from Chinese power utilities in the US$120-$130/t range.

● We downgrade ADRO to UNDERPERFORM. Our earnings forecast is cut by 9% and 20% below consensus. ADRO is trading at the highest P/E of 17.9x. We cut our target price to Rp2,050. (We also change other target prices. See table below.) We initiate
our coverage on HRUM with a NEUTRAL rating.

● We prefer companies with strong earnings momentum or positive company-specific catalysts. We initiate coverage of Indika (INDY) with an OUTPERFORM rating and rate it as our top pick with 30% potential upside. We suggest a switch from ADRO to INDY,
PTBA, ITMG, and SAR.