Equity Research April 1, 2019 Yanzhou Coal Mining 2018 results slightly beat expectation; output continues growing Results Review Maintain HOLD 2018 results slightly beat expectation Ticker 600188.SH 01171.HK Yanzhou Coal-H’s 2018 revenue and net profit rose 28% and 17% YoY CICC investment rating HOLD HOLD to Rmb67.4bn and Rmb8.6bn (Rmb1.75/sh), slightly above our Last close Rmb11.11 HK$8.54 CICC target Rmb12.50 HK$9.00 expectation due to lower financial expenses in 4Q18. It proposed a cash dividend of Rmb0.54/sh, about 31% of H-share attributable net 52wk price range Rmb15.11~8.36 HK$~ profit. Yanzhou Coal-H’s 2H18 revenue and attributable net profit Market cap (bn) Rmb47 HK$55 climbed 18.4% and 1.2% YoY to Rmb35.2bn (+9.3% HoH) and Daily value (mn) Rmb370.71 HK$140.64 Rmb3.96bn (-14% HoH). Shares outstanding (mn) 4,912 4,912 Free float (%) 60 40 Commercial coal output was 95.1mnt in 2018 (+19% YoY) and Daily volume (mn sh) 34.72 17.71 24.1mnt in 4Q18 (-6% YoY and +7% QoQ). ASP of self-produced coal Business sector Coal was Rmb542/t in 2018 (+10% YoY with +3% in China and +15% at Yancoal Australia) and Rmb544/t in 4Q18 (+6% YoY and -3% QoQ). HSCEI Sales cost of self-produced coal were Rmb252/t in 2018 (+16% YoY) 106 and Rmb262/t in 4Q18 (+13% YoY and -4% QoQ). SG&A expense rose 100 15% YoY to Rmb10.7bn in 2018 due to increasing sales volume of 94 Yancoal Australia and Rmb1.02bn in provisions for changes in social 88 security contributions. Operating cash flow rose 50% YoY to Rmb18.2bn in 2018 and capex totaled Rmb10.8bn. (%) Value Relative 82 76 Apr-2018 Jul-2018 Sep-2018 Dec-2018 Mar-2019 Trends to watch The company guides sales volume of self-produced coal at 100mnt (Rmb mn) 2017A 2018A 2019E 2020E (+6.8% YoY) and capex at Rmb9bn in 2019. We expect seasonal Revenue 52,672 67,447 66,844 67,939 weakening in thermal coal price in near term, and forecast thermal (+/-) 58.3% 28.1% -0.9% 1.6% average coal price will drop 8% in 2019. Net profit 7,363 8,583 7,429 7,833 (+/-) 346.4% 16.6% -13.4% 5.4% Earnings forecast EPS 1.50 1.75 1.51 1.59 We cut our 2019 A/H-share EPS forecasts 9% and 4% to Rmb1.56 and BPS 9.65 10.60 11.32 12.27 Rmb1.51, and introduce 2020 forecasts at Rmb1.60 and Rmb1.59. DPS 0.48 0.54 0.52 0.54 CPS 2.48 3.71 4.53 4.61 P/E 4.7 4.3 5.0 4.7 Valuation and recommendation P/B 0.7 0.7 0.7 0.6 Yanzhou Coal-A is trading at 7.1x and 6.9x 2019e and 2020e P/E, and EV/EBITDA 4.5 3.9 4.3 3.7 Yanzhou Coal-H at 5.0x and 4.7x. Maintain HOLD for A/H-share. Dividend yield 6.7% 7.2% 6.9% 7.1% Maintain A-share TP at Rmb12.5 (8.0x and 7.8x 2019-2020e P/E and ROAA 4.3% 4.3% 3.5% 3.6% 13% upside); cut H-share TP 10% to HK$9 (5.3x and 5.0x P/E and 5% ROAE 17.4% 17.3% 13.8% 13.5% upside). Risks Disappointing coal demand and/or coal prices. Source: Wind, Bloomberg, Corporate filings, CICC Research Yan CHEN, CFA Yubo DONG, CFA, CPA James HU Analyst Analyst Analyst [email protected] [email protected] [email protected] SAC Reg. No.: S0080515060002 SAC Reg. No.: S0080515080001 SAC Reg. No.: S0080118050025 SFC CE Ref: ALZ159 SFC CE Ref: BFE045 SFC CE Ref: BGF975 Please read carefully the important disclosures at the end of this report CICC Research: April 1, 2019 Financial summary Financial statement (Rmb mn) 2017A 2018A 2019E 2020E Financial ratios 2017A 2018A 2019E 2020E Income statement Growth ability Revenue 52,672 67,447 66,844 67,939 Revenue 58.3% 28.1% -0.9% 1.6% COGS -33,757 -43,141 -45,962 -47,031 Operating profit 179.7% 34.5% -19.3% 3.0% Selling expenses -4,953 -4,893 -3,488 -3,312 EBITDA 115.0% 20.7% -8.5% 4.5% Administrative expenses -4,306 -5,767 -4,842 -4,877 Net profit 346.4% 16.6% -13.4% 5.4% Other ops income (expense) 4,877 5,897 3,223 3,523 Profitability Operating profit 14,534 19,543 15,776 16,243 Gross margin 35.9% 36.0% 31.2% 30.8% Finance costs -3,255 -3,612 -3,461 -3,257 Operating margin 27.6% 29.0% 23.6% 23.9% Other income (expense) 0 0 0 0 EBITDA margin 38.4% 36.2% 33.4% 34.3% Profit before income tax 11,278 15,931 12,316 12,986 Net margin 14.0% 12.7% 11.1% 11.5% Income tax -2,715 -4,608 -3,030 -3,195 Liquidity Minority interest -1,201 -2,740 -1,857 -1,958 Current ratio 1.02 1.09 1.11 1.29 Net profit 7,363 8,583 7,429 7,833 Quick ratio 0.98 1.02 1.04 1.22 EBITDA 20,227 24,408 22,327 23,329 Cash ratio 0.33 0.46 0.48 0.66 Recurrent net income 7,363 8,583 7,429 7,833 Liabilities / assets 59.6% 57.7% 56.6% 55.1% Balance sheet Net debt / equity 30.7% 27.5% 23.8% 10.8% Cash and bank balances 21,073 27,373 29,454 40,810 Return Trade and bill receivables 12,991 9,157 9,075 9,224 RoA 4.3% 4.3% 3.5% 3.6% Inventories 3,079 4,069 4,240 4,340 RoE 17.4% 17.3% 13.8% 13.5% Other current assets 28,105 24,231 24,753 25,719 Per-share data Total current assets 65,249 64,831 67,522 80,093 EPS (Rmb) 1.50 1.75 1.51 1.59 Fixed assets and CIP 50,784 56,192 62,021 58,637 BPS (Rmb) 9.65 10.60 11.32 12.27 Intangible assets and others 81,280 84,981 83,379 81,756 DPS (Rmb) 0.48 0.54 0.52 0.54 Total non-current assets 132,064 141,173 145,400 140,393 Cash flow per share (Rmb) 2.48 3.71 4.53 4.61 Total assets 197,313 206,004 212,922 220,486 Valuation Short-term borrowings 0 0 0 0 P/E 4.7 4.3 5.0 4.7 Trade and bill payables 8,973 12,514 13,040 13,346 P/B 0.7 0.7 0.7 0.6 Other current liabilities 54,752 47,086 47,993 48,523 EV/EBITDA 4.5 3.9 4.3 3.7 Total current liabilities 63,725 59,600 61,033 61,870 Dividend yield 6.7% 7.2% 6.9% 7.1% Long-term borrowings 45,546 51,350 51,465 51,532 Total non-current liabilities 53,892 59,358 59,473 59,541 Total liabilities 117,617 118,959 120,506 121,410 Share capital 4,912 4,912 4,912 4,912 Retained profit 42,499 47,165 50,679 55,381 Equity 47,411 52,077 55,591 60,293 Total liabilities & equity 197,313 206,004 212,922 220,486 Cash flow statement Pretax profit 8,564 11,323 9,286 9,792 Depreciation & amortization 4,313 6,613 7,054 7,709 Change in working capital 10,356 121 884 -342 Others -11,071 187 5,013 5,504 Cash flow from operations 12,162 18,243 22,236 22,663 Capital expenditure -20,523 -13,634 -16,241 -8,175 Others -10,319 3,462 0 0 Cash flow from investing -30,841 -10,172 -16,241 -8,175 Equity financing 0 0 0 0 Bank borrowings 23,580 -1,891 -3,915 -3,132 Others 0 0 0 0 Cash flow from financing 23,580 -1,891 -3,915 -3,132 Foreign exchange gain (loss) -248 120 0 0 Net changes in cash 4,652 6,300 2,081 11,356 Source: Corporate filings, CICC Research Company description Yanzhou Coal Mining Co., Ltd. is the largest coal producer in eastern China and one of the largest coal exporters. The company is principally engaged in the underground mining, preparation, sales and railway transportation of coal. It mainly produces semi-hard coking coal, semi-soft coking coal, PCI coal and thermal coal, which are mainly distributed to customers in eastern, southern and northern China as well as Japan, South Korea and Australia. In an active step to develop the coal chemical industry, Yanzhou has invested in the construction of the biggest domestic methanol production base in the Yulin region of Shaanxi Province to produce methanol and acetic acid, etc. Please read carefully the important disclosures at the end of this report 2 CICC Research: April 1, 2019 Figure 1: 2018 results review 2018A vs CICC 2019E (Rmb mn) 2017A 2018E 2018A 2019E YoY estimate YoY Revenue 52,672 61,956 67,447 28.1% 8.9% 66,844 -0.9% Gross profit 18,915 26,596 24,307 28.5% -8.6% 20,883 -14.1% Operating profit 14,534 17,050 19,543 34.5% 14.6% 15,776 -19.3% Net profit 7,363 7,180 8,583 16.6% 19.5% 7,429 -13.4% Fully-diluted EPS (Rmb) 1.50 1.46 1.75 16.6% 19.5% 1.51 -13.4% Gross margin 35.9% 42.9% 36.0% 0.1ppt -6.9ppt 31.2% -4.8ppt Operating margin 27.6% 27.5% 29.0% 1.4ppt 1.5ppt 23.6% -5.4ppt Net margin 14.0% 11.6% 12.7% -1.3ppt 1.1ppt 11.1% -1.6ppt Source: Corporate filings, Wind Info, CICC Research Figure 2: Semi-annual earnings Rmb mn 1H2017 2H2017 1H2018 2H18 HoH YoY 2017 2018 YoY Sales revenue 22,922 29,750 32,220 35,227 9.3% 18.4% 52,672 67,447 28.1% Sales cost 14,831 18,926 19,869 23,272 17.1% 23.0% 33,757 43,141 27.8% Gross profit 8,091 10,824 12,352 11,955 -3.2% 10.4% 18,915 24,307 28.5% SG&A 3,233 6,026 5,293 5,367 1.4% -10.9% 9,259 10,660 15.1% Equity investment gains 342 514 854 681 -20.2% 32.5% 855 1,534 79.4% Other operating revenue 1,172 2,850 2,345 2,017 -14.0% -29.2% 4,022 4,362 8.5% EBIT 6,373 8,161 10,257 9,286 -9.5% 13.8% 14,534 19,543 34.5% Financing cost 1,323 1,932 1,816 1,797 -1.0% -7.0% 3,255 3,612 11.0% EBT 5,050 6,229 8,442 7,489 -11.3% 20.2% 11,278 15,931 41.3% Income tax 1,131 1,584 2,494 2,114 -15% 33% 2,715 4,608 70% Net profit 3,919 4,645 5,948 5,375 -9.6% 15.7% 8,564 11,323 32.2% Minority interest 468 733 1,325 1,415 7% 93% 1,201 2,740 128% Profit attributable to shareholders 3,451 3,911 4,623 3,960 -14.3% 1.2% 7,363 8,583 16.6% Diluted EPS(Rmb) 0.70 0.80 0.94 0.81 -14.3% 1.2% 1.50 1.75 16.6% Gross margin 35.3% 36.4% 38.3% 33.9% -4.4ppt -2.4ppt 35.9% 36.0% 0.1ppt Operating margin 27.8% 27.4% 31.8% 26.4% -5.5ppt -1.1ppt 27.6% 29.0% 1.4ppt Net margin 15.1% 13.1% 14.3% 11.2% -3.1ppt -1.9ppt 14.0% 12.7% -1.3ppt SG&A ratio 14.1% 20.3% 16.4% 15.2% -1.2ppt -5ppt 17.6% 15.8% -1.8ppt Financing costs ratio 5.8% 6.5% 5.6% 5.1% -0.5ppt -1.4ppt 6.2% 5.4% -0.8ppt Effective tax rate 22.4% 25.4% 29.5% 28.2% -1.3ppt 2.8ppt 24.1% 28.9% 4.9ppt Source: Corporate filings, Wind Info, CICC Research Please read carefully the important disclosures at the end of this report 3 CICC Research: April 1, 2019 Figure 3: Key assumptions Price(Rmb/t) 2019e new 2019e old Diff 2020e new ASP of self-produced coal 505 487 4% 504 Domestic ASP 486 499 -3% 486 Australian ASP 551 512 8% 547 Production (kt) 2019e new 2019e old Diff 2020e new Total 102,902 101,648 1% 108,616 China 60,372 59,929 1% 63,685 Australia 42,530 41,719 2% 44,932 Sales volume(kt) 2019e new 2019e old Diff 2020e new Total 100,236 97,951 2% 102,638 China 57,706 56,232 3% 57,706 Australia 42,530 41,719 2% 44,932 Financials (Rmb mn) 2019e new 2019e old Diff 2020e new Total revenue 66,844 62,043 8% 67,939 COGS 45,962 35,818 28% 47,031 Gross profit 20,883 26,224 -20% 20,908 SG&A 8,330 8,693 -4% 8,189 Net non-operating income 3,223 647 n.a.