On October 20, a major coal mine accident took place at Shandong Longyun Coalmine （not a Yanzhou asset）， due to a rock burst （a spontaneous, violent fracture ofrock that can occur in deep mines）。 As a result, an emergency notice by theShandong Coal mine safety supervision department was issued, imposing a specialsafety inspection on 41 coal mines located in Shandong, which are subject to similarrisk of a potential rock burst. The inspections will last one week, during which timeproduction at the target coal mine will be suspended, according to comments fromboth the China Coal Association and Yanzhou Coal. Specifically, three of Yanzhou’scoal mines located in the Shandong region were included on the inspection list,which we estimate represent total annual capacity of 15.6mnt, or 44% of YanzhouShandong operations, and 17% of the company’s total operations. Assuming oneweek of production suspension, the disruption would lead to a 0.3mnt output cut, or0.32% of Yanzhou’s full-year 2018E output, and 0.3% of the earnings impact on2018E in our estimates.
At the industry level, a one-week disruption at the 41 coal mines subject toinspection could lead to a 3mnt cut to output （based on estimates from the ChinaCoal Association）， or 0.08% of China’s coal output, thus, the impact to the marketwould also be limited, in our view.
The three Yanzhou coal mines affected are: （1） Dongtan Mine （东滩） – 7.5mnt annualcapacity, thermal coal. （2） Jining No.2 Mine （济宁二号） – 4.2mnt annual capacity ofthermal coal. （3） Zhaolou （赵楼） with 3.9mnt capacity of semi-coking coal. Weestimate the three coal mines account for 15.8% of total gross profit, based on theirspecific type of coal product, and average HQ production cost. We estimate aone-week suspension would lead to a 0.3mnt impact on output, or a 1.9% impact ontheir contribution to total profit – leading to a 0.3% impact on total profit, all elseequal.
We maintain our BUY rating on both Yanzhou Coal Mining H/A shares. Our 12-monthtarget price for Yanzhou-H remains at HK12.0 and for Yanzhou-A remains Rmb14.6,and our TP methodology is unchanged, based on historical P/B vs. ROE correlation –or 2019E P/B of 0.82X/1.19X at an ROE of 15.1%.
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.