Challenge remains; worsen CFO and decreasing BV, reiterate Sell
Yanzhou Coal reported 1H15 results after market close on 29 August 2015. Thecompany’s revenue under IFRS at RMB18bn was down 38% HoH and 41%YoY, only reaching 36% of FY15 DBe and 35% of Bloomberg consensus.However, its 1H15 NPAT (under IFRS) at a c.RMB50m loss, RMB0.01/share, isbetter than FY15 DBe (RMB663m net loss) and Bloomberg consensus(RMB535m net loss). Meanwhile, its revenue under the China GAAP wasreported at RMB25bn, down 20% HoH and 22% YoY with a NPAT ofRMB629m, down 57% HoH and 61% YoY.
Deteriorating cash flow from operations and book value continued to shrink
Although Yanzhou Coal had a close to breakeven NPAT for 1H15, better thanour and Bloomberg consensus’ expectation, we are still concerned about (i)poor operating cash flow, which deteriorated heavily to negative RMB2bn frompositive RMB3.8bn in 2H14, and (ii) reduced equity attributable toshareholders, which continued to decline to RMB36.8bn, down 5% HoH and13% YoY. Therefore, we believe the company’s value may not be correctlyderived from its accounting NPAT.
Good operational results, but sustainability remains to be seen
Yanzhou reported an impressive average unit cost cut by RMB81/t, down 21%HoH and 27% YoY in 1H15, when its ASP dropped by RMB26/t, down only6.8% HoH and 21% YoY. During the same period, the benchmark price, QHD5500K, lost RMB41/t, down 8.2% HoH. The sales volume of self-produced coalshrank only 8% HoH, though external purchase volume declined by 64% HoH.Revenue from coal to chemical and power business significantly improved in1H15 but was not large enough to offset the coal operation drop.
Challenge remains, unattractive valuation; reiterating Sell
Our recent report, Darker days ahead for China’s coal industry, published 3 August2015, points out that overcapacity would continue to trouble the China coalindustry and coal price. For Yanzhou Coal, its deteriorating cash flow andincreasingly high gearing ratio are restricting the big potential of adjustment.Considering Yanzhou has been continuing to lose its book value, (RMB7.49/shas of 1H15), the current trading price of HK$3.9, the closing price on 28August, at PBx of 0.52 is not cheap. Our HK$2.6 TP is derived from DCF-basedSOTP with a WACC of 6.8%. Major risk: Dramatic Chinese policy change.