Yanzhou reported 1H18A NP of Rmb4.6bn and EPS of Rmb0.941/sh both up 34%YoY. Excluding one-offs including a Rmb1.0bn one-time social insurance premiumcharge in SG&A cost offset others, recurring profit would be Rmb4.1bn in ourestimates, up 23% YoY, and just 5% behind our estimates, as solid operationalresults were partly offset by higher-than-expected tax rate and minority interest.
Self-mined coal sales was 47.6mnt, up 43% YoY, driven by growth in YAL andnon-headquarter China assets. Specifically, YAL sales reached 16.4mnt, up 163% YoY,mostly due to the inclusion of C&A assets post September of 2017A. Sales fromHeze Nenghua and Ordos Nenghua nearly doubled YoY to 1.6mnt and 7.4mnt in1H18A, respectively. Total sales was c.7% short versus our expectation, however,mostly due to the shortfall in Haosheng （down 10% YoY and down 53% HoH）。
ASP of self-mined coal was Rmb532/t, up 10% YoY, 3% better vs. our estimates.ASP of the headquarters’ was Rmb590/t, flat YoY, mostly in line with QHD5500blended prices. The average price of other China assets was Rmb372/t, up 10% YoY.The average prices of YAL was Rmb613/t, up 28% YoY, consistent with the NEWC’sprice moves over the period.
No surprise on costs. Unit COGS of self-mined coal was Rmb263/t, up 11% YoY,driven mostly by cost hikes in other CN assets especially Haosheng and OrdosNenghua, and YAL （up 17% YoY） - overcall average cost was slightly higher thanexpected mostly due to mix changes. SG&A was Rmb5.3bn, up 64% YoY, 18%higher than expected due to the one-off charge in social insurance premium（Rmb1.0bn）， and Rmb526mn higher royalty cost at YAL due to increasing sales. On arecurring basis, we estimate unit SG&A was Rmb90/t, up 7% YoY, mostly in line withour expectations.
Income from associate and JV reached Rmb854mn, more than doubled YoY, partlydue to the Rmb358mn contribution from Yanzhou’s investment in Zheshang Bank（and re-categorized in 1H18A）。 Other income was Rmb2.3bn, nearly doubled YoY,well ahead of our expectation, most of which we expect are not earnings on arecurring basis, pending further disclosures from the company. Overall other incomeand associate income accounted for 31% of EBIT in 1H18A in our estimates.
Operating cash flow was Rmb7.6bn, up 188% YoY. Net debt slightly fell by 2% versusend of 2017A. Net gearing improved from 57% at end of 2017A to 54%.
We expect the thermal coal market supply to remain tighter than expected in2018E and 2019E, due to limited capacity expansion while demand remains mostlystable. We expect the QHD 5500 blended price to reach an average of Rmb595/t in2018E and Rmb590/t in 2019E （vs. Rmb575/t for 2018E and Rmb550/t for 2019E in priorestimates）。
We revise our NP estimates up by 10% for 2018E, 6% for 2019E and 7% for 2020E, toreflect the updated coal prices, and higher other income assumptions. On our higherrevised estimates, we increase our 12-month target price for Yanzhou-H to HK$9.4/sh（from HK$9.1/sh） and cut our 12-month target price for Yanzhou-A to Rmb12.5/sh （fromRmb13.2/sh）。 Maintain Neutral on Yanzhou H/A. Our target price methodology remainsunchanged, based on historical P/B vs. ROE correlation - or 2019E P/B of 0.7X/1.1X at anROE of 11.7% - assumptions unchanged.
Key risks include: 1） Coal prices in both the domestic China and international seabornemarkets, which are affected by both the supply-demand balance in the Chinese andinternational markets; demand for coal is mostly driven by the power, steel and buildingmaterials sectors; transportation capacity for coal, including both rail and ports, is also akey factor affecting coal prices; 2） the Chinese government’s export policy on coal,including export VAT rebate changes, export tax changes, and import tariff; and 3）additional unexpected cost imposed on coal producers by the government, especiallyrelating to environmental concerns and resources.