1H19 earnings higher than our forecast
Yanzhou Coal-H’s 1H19 revenue rose 3.2% YoY to Rmb33.2bn andattributable net profit grew 25.7% YoY to Rmb5.8bn （Rmb1.18/sh），higher than our forecast, mainly thanks to rising sales and prices ofclean coal, and a YoY decline in financial expenses. The firmannounced interim dividend of Rmb1/sh, implying a 92% dividendpayout ratio for Yanzhou Coal-A. The interim dividend is equivalent to10.5% and 16% of its A-share and H-share market cap.
1） 1H19 output of commercial coal fell 3.1% YoY to 47mnt, but itsdomestic output of clean coal rose 9% YoY to 9.1mnt. 1H19 sales ofself-produced coal fell 5.7% YoY to 45mnt but domestic clean coalsales as a percentage of overall self-produced coal sales rose 2.7pptYoY to 21%. 2） 1H19 ASP of self-produced coal rose 3.6% YoY toRmb551/t, while ASP of 5,500kcal thermal coal at QHD fell 8.7% YoY.
ASP of self-produced coal rose YoY in 1H19, as the proportion ofclean coal in its total sales rose and the domestic ASP of clean coalrose 8.6% YoY. 3） A-share’s unit sales cost for self-produced coal fell0.8% YoY to Rmb253/t in 1H19. 4） G&A expenses fell by 37% or byRmb1.17bn YoY in 1H19 due to base effect. 5） Financial expenses fellby 30% or by Rmb580mn YoY in 1H19. 6） Capex totaled Rmb2.2bn in1H19 and capex guidance for full-year 2019 is Rmb9bn.
Trends to watch
Domestic new coal capacity gradually releases but coal imports mayfall. Stricter regulations on safety and environmental protection mayweigh on coal output in the near term. We believe thermal coal pricehas limited downside. Coking coal producers have strong bargainingpower over coking chemical firms and we believe the price of cokingcoal will remain stable in 2H19.
Financials and valuation
We raise our 2019 and 2020 EPS forecasts by 18%/18% to Rmb1.84/1.90 for Yanzhou Coal A-share, and by 24%/22% to Rmb1.88/1.95 forH-share. The firm’s A-/H-share are trading at 5.0x/3.1x 2020e P/E. ForA-share we maintain NEUTRAL rating and TP of Rmb12.50 （6.6x2020e P/E, 30.6% upside）。 For H-share we maintain NEUTRAL ratingand TP of HK$9 （4.1x 2020e P/E, 32.6% upside）。
Risks
Worse-than-expected decline in coal price.