1Q16 results appeared to beat
Yancoal announced its 1Q16 GAAP results after market close on April 28th,2016. Its top line arrived at RMB11.768bn, achieving 26% of DBe (IFRS) and36% Bloomberg consensus (GAAP). The company added iron ore and steeltrading to boost the top line (only accrued in GAAP) since 4Q15. Meanwhile, Its1Q16 bottom line was RMB351mn. Compared to DBe for 2016 full year at netloss of RMB1230mn and FY16 Bloomberg consensus at net loss ofRMB1,158mn, Yanzhou’s results appeared to beat.
Volume and ASP both dropped in 1Q16; cost reduction a rescue
Revenue from coal operation dropped by RMB2.2bn, compared to 1Q15.Company’s coal production declined to 14.5mt, down 6% YoY. Totalcommercial coal sales dropped to 16.4mt, down 11% YoY, because of minemaintenance in Ordos, and sales decline for Yancoal Australia. Overall and selfproducedASP of Yancoal dropped RMB66/t and RMB22/t QoQ respectively,worse than benchmark prices movement in 1Q16. However, COGS/t were cutsignificantly by RMB116/t in 1Q16. The cost reduction is likely contributed bychanging sales mix but sustainability of the cost reduction remains to be seen.
Improving ASP in 2Q16 but volume rebound might be limited
ASP of coal in Shandong has improved by c. RMB30-50/t. Therefore, companymay benefit more from price improvement in 2Q16. However, volume increaseremains to be seen. As the company has two mines that are now on the InnerMongolia’s restriction list (for ramping up) and it also plans to shutdown oldmines in Shandong province in the near term in exchange of ramping up morecapacities in Inner Mongolia, we believe Yanzhou’s coal production volume inFY16 may not increase significantly.
Structurally unfavorable and company financials difficult to read; Sellmaintained
Though profitable in 1Q16, Yanzhou’s operating cashflow remained to benegative. While we are concerned about coal industry’s structural weakness,Yanzhou coal’s iron ore trading and bank investments will make its financialseven more difficult to read. We believe Yanzhou coal trading at 0.47x 2016DBe BVPS is already a stretch and reiterate Sell for the company.