3Q18 earnings declined QoQ
Yanzhou Coal’s 1–3Q18 revenue fell 0.2% YoY to Rmb119bn, net profitattributable to shareholders rose 13.4% YoY to Rmb5.5bn（Rmb1.12/sh） and recurring attributable net profit grew 35% toRmb5.9bn. 3Q18 revenue climbed 11% YoY to Rmb43bn, whileattributable net profit declined 45% QoQ to Rmb1.2bn （-28% YoY）。
Comment: 1） 1–3Q18 output of commercial coal rose 31% YoY to71mn tonnes, while 3Q18 output rose 15% YoY to 22.5mn tonnes（-7% QoQ）。 2） 3Q18 ASP of self-produced coal reached Rmb562/t（+14% YoY and +5% QoQ）， but average sales cost also rose toRmb272/t （+34% YoY and +11% QoQ）。 3Q18 blended gross margin fell1.2ppt QoQ to 18% （+2.2ppt YoY）。 3） 1–3Q18 sales expense increased85% YoY to Rmb4.6bn. 3Q18 sales expense grew 65% YoY toRmb1.66bn （+17% QoQ）。 4） 3Q18 income tax plunged 1.5x YoY toRmb1.12bn （-27% QoQ） with effective tax rate at 38% （+19.1ppt YoYand +3.5ppt QoQ）。 5） 3Q18 profit attributable to minority intereststotaled Rmb673mn （+1.2x YoY and +4.4% QoQ）， while the portion ofMI topped 36.7% （+20.7ppt YoY and +14.6ppt QoQ）。
Trends to watch
Coal supply to remain tight. Although inventory stays high at IPPsand Daqin Railway’s transport capacity may recover aftermaintenance, we expect environmental checks to continue weighingon coal mine supply, and coal import might be weak. As demandgradually rebounds, we think coal supply will remain tight in 4Q18.
Earnings forecast
Given the significant decline in 3Q18 earnings, we cut our 2018/19EPS forecast by 13/5% to Rmb1.46/1.57.
Valuation and recommendation
Yanzhou Coal-H is trading at 4.9/4.6x 2018/19e P/E, while YanzhouCoal-A is trading at 7.4/6.6x. Maintain HOLD for Yanzhou Coal-H/-Aand cut TPs by 9/7% to HK$10 （5.6/5.2x 2018/19e P/E）/Rmb12.5（8.2/7.3x 2018/19e P/E）， implying 14/11% upside room.
Risks
Disappointing coal demand or coal prices.