Yanzhou Coal Buy at Chinavestor


September, 2011 (Yosua Nainggolan) We recommend a BUY for Yanzhou Coal Mining Co. Ltd. (NYSE:YZC). With an average revenue and net income growth rate of 33% and 56%, the company has growth potential very far into the future. It is clear that the company is very generous in using its resources to invest in new and promising coal projects. We believe that its current unfavourable price standings are not the result of Yanzhou Coal’s own incompetence, but rather a global trend across the current industry. When things start picking up for the energy industry as a whole, we believe that stock price of Yanzhou Coal will really increase in value.Related stocks mentioned in this report include China Shenhua Energy (HKG:1088) and China Coal Energy (HLG:1898).

Strong earnings growth and financial position

 Yanzhou Coal (NYSE:YZC) 2010 results indicate that, on a yearly basis, revenues increased by 64%, net income increased by 125%, and assets increased by 16.5%.  The company has also shown increases in the first half of 2011, and is guiding for further increases in the rest of the year. 

Performance relative to competition

 Yanzhou Coal Mining (NYSE:YZC) currently populates around 17% of the Chinese coal market. This market share is expected to grow along the increase in the global coal demand. Yanzhou Coal also appears to have been experiencing a faster growth compared to its two main competitors, China Coal Energy (HKG:1898) and China Shenhua Energy (HKG:1088). With its current rate of growth, it is likely that Yanzhou Coal (HKG:1171) may significantly increase its market share in the future.

 Growth Prospect
 Yanzhou Coal’s eagerness to utilize many of its cash resources to invest in various coal projects in and out of China in the past couple of years shows that the company is setting itself on a road to great expansion. The government of China is also set to consolidate coal mines and improve mining infrastructures, which could only further aid Yanzhou Coal’s operations in China.




 1 Strong Earnings Growth and Financial Position
The results for 2010 show strong revenues and earnings growth as compared to the previous year.Net Sales increased by 64% from the year before to RMB 33,944.25 millions.  Net Income increased by 125% to RMB 9,281.38. If we calculate the first half of 2011, there is also an interim growth of 8% in revenue alone.

Interim Net Sales and Net Income Growth, Yanzhou Coal Mining (NYSE: YZC)


  Looking back at Yanzhou Coal (NYSE:YZC) in 2007, they were already a promising prospect, but nowhere close to what they are right now. In our analysis, Yanzhou Coal started with only around RMB6.7 billion of net sales for the first half of 2007, and grew quite significantly into around RMB8.7 billion in the latter half of the year. Their sales continued to grow even more as they moved into the first half of 2008, moving up 37% to RMB11.9 billion. When the global recession took its start in the third quarter of 2008, Yanzhou Coal’s bottom line dropped 34% to RMB2.5 in the second half of 2009.

After sales dropped to only RMB9.2 billion, the company rebounded back to growth in the second half of the year, jumping up 24% to RMB11.4 billion close to their previous high. In 2010, Yanzhou Coal enjoyed phenomenal growth. In the first half of the year alone, Yanzhou Coal Mining (NYSE:YZC) grew 33% to RMB15.2 billion net sales, only to be topped by an RMB18.7 billion in the second half of the year.

Although income increased significantly in 2010, cash was actually down 25% from 2009. Even so, the company still looks to be going through a steady growth phase. Total assets still noticeably increased from 2008 and 2010. More importantly, huge expansion efforts are still being made, evident by the nearly 200% increase of deposits made on investments to 3,243,679 in 2010. This deposit is composed of acquisitions of the Shaanxi coal mine operating company, Inner Mongolia Haosheng Coal Mining Limited, and Yijinhuoluo Qi Nalin Tao Hai Town An Yuan Coal Mine. Under the care of YZC, these mines have the potential to bring in significant revenues to the company.

Cash Flow, Yanzhou Coal Mining (NYSE:YZC)


  Throughout the years, Yanzhou Coal Mining (NYSE:YZC) continues to add to the variety of the coal types they sell. To better calculate the effect of coal price fluctuations, we decided to use the average price for all the coal types sold by Yanzhou. As expected, the average coal price moved in correlation with the company’s sales level, this includes a significant drop from RMB640.24/ton to RMB529.16/ton following the 2008-2009 global recession. Throughout the four years, coal sales continue to compose 93%-97% of Yanzhou Coal’s total sales figure. The continually growing price and demand for energy, including coal, promises high revenues for Yanzhou Coal’s future.


 2. Performance Relative to Competition

Other major players in the Chinese coal industry include the State Council ran China National Coal Group Corporation, and the world’s largest coal producing company Shenhua Group. Together with Yanzhou, they compose approximately 90% of the coal market capitalization of China. 

Market Capitalization Comparison


 Yanzhou Coal’s biggest competitor, China Shenhua Energy Co Ltd. (HKG:1088) has also been doing well in the past 5 years. As the company is bigger and older than Yanzhou Coal, China Shenhua Energy (HKG:1088) has been experiencing a less dramatic climb in Total Asset numbers. In 5 years, China Shenhua Energy’s Total Assets almost doubled from RMB172,360 million to RMB340,860 million, with an average annual growth of 19%. Although net income growth is slightly lagging behind revenue growth, the company is still showing signs of healthy growth, especially in its average annual cash growth of 68%. China Shenhua Energy (HKG:1088) is currently looking to own 40% in the western Tsankhi block of Mongolia’s Tavan Tolgoi coal, one of the world’s biggest coking coal deposits. China Shenhua Energy (HKG:1088) will be sharing the project with a Russian-led consortium (36%) and US mining giant Peabody Energy (NYSE:BTU) (24%). Although there are currently many complaints by Japanese and Korean firms concerning the bidding process to this project, the Tavan Tolgoi coal project will be a major profit-generator for any entity controlling it. 

China Shenhua Energy  (HKG:1088) Financial Performance


 Like Yanzhou Coal and China Shenhua Energy, China Coal Energy Co Ltd (HKG:1898) has also been experiencing remarkable growth in the last 5 years. Total Assets almost tripled from RMB45,113.7 million in 2006 to RMB122,936 million in 2010, with an average annual growth rate of 31%. Like Yanzhou Coal, China Coal Energy (HKG:1898) seems to be doing a good job in managing its operations, proven by its 25% average annual revenue growth that is paired with a 28% average annual net income growth. From a cash perspective, China Coal Energy (HKG:1898) has been increasing its cash balances for quite some time now, growing an average of 37% annually, from as low as only RMB 4,278 million in 2007 to 2010’s RMB22,922 million. If we look deeper into the financial statement, a considerable amount of these cash increase is caused by an RMB18,190 million decrease in placement of term deposits. The company may be looking to gather enough cash for a major expansion, much like those done by its competitors. 

China Coal (HKG:1898) Financial Performance


 Going from RMB23,458.70 million to RMB72,755.90 million in merely 5 years in certainly something Yanzhou Coal Mining Co. (NYSE:YZC) should be proud of. Through a series of major acquisitions of mining complexes all around the country, Yanzhou coal more than doubled its size and income, enjoying an average Total Asset growth of 36% annually. The company does not look it will be slowing down anytime soon either. In recent news, Yanzhou just purchased two Australian coal producers, Syntech Holdings Pty Ltd and Syntech Holdings II Pty Ltd for $222.08 million in cash. This transaction is similar to a number of Yanzhou Coal’s past deals which utilize mostly cash. The effect of this pattern can be seen in Yanzhou Coal’s relatively low annual cash balance, which in 2010 was even lower than their Net Income. Yanzhou Coal has been relatively efficient in managing their expenses, evident by the steady growth rate of their Net Income as compared to Revenue. Looking at P/E ratios, Reuters.com has the industry average at 22.57 with Yanzhou Coal, China Shenhua Energy (HKG:1088), and China Coal Energy (HKG:1898) at 12.61, 16.52, and 16.48 respectively. Yanzhou Coal (NYSE:YZC) seems to be valued pretty low among its competitors. However, with its strong finances and great expansion potential, Yanzhou Coal can still be a highly profitable investment. 

Yanzhou Coal (NYSE:YZC) Financial Performance


 After analysing each company’s growth characteristics, we can see that all three companies are going through promising growth phases, and should be considered by any investor looking to ride along the Chinese coal industry boom. Yanzhou Coal looks to be putting more effort to expand their operations, with hopes of great returns in the future.

Below is the summary for all three companies’ financial performance.


 3. Growth Prospect

According to the World Nuclear Organization, 68.7% of China’s electric energy is produced from coal, creating the world’s largest coal industry to fulfill that domestic demand. A review done by BP in 2007 shows that China, with 62 billion tons of anthracite and 52 billion tons of lignite coal, is only third behind the United States and Russia in terms of total coal reserves. At current level of production, the reserves are forecasted to be able to sustain China’s needs for the next 48 years.
This major consumption and production of coal, however, is not complemented with adequate infrastructure and safety measures. To battle these issues, the Chinese government released a mandate of consolidation within the industry. Following an executive meeting of China’s State Council, or Cabinet, on August 25, 2010, China’s Premier Wen Jiabao reiterated the need for the country’s coal mine enterprises to continue with mergers and acquisitions for the healthy development of the industry. The Chinese government is aiding state-owned companies and private coal mine operators in initiating roll-ups of smaller inefficient mines in an effort to modern the country’s coal mining industry and address safety concerns.
These consolidations are followed by plans of solving the mainland coal transportation bottlenecks. The government has begun constructing railroads that will ease coal transportation from Chinese mining regions to the south and east, where most consumers are located. The country is expected to be able to increase its coal transportation capacity by 50% in the next five years. That would mean an approximate increase from 2 billion tons last year to 3 billion transported in 2015.
With the government favoring the bigger players to take over more coal mines, and improving infrastructure, Yanzhou Coal has all the tools necessary to thrive even more in the near future. As discussed earlier, Yanzhou Coal (NYSE:YZC) is also undertaking expansion efforts outside of China. From smaller projects in South-East Asia, to their recent acquisition of the Australian Syntech Holdings, Yanzhou Coal seems to be running on all gears.
However, Yanzhou Coal’s aggressiveness, if not accompanied by some risk aversion, can also be their downfall. As we have discussed earlier, Yanzhou Coal Mining (NYSE:YZC) seems to prefer using cash for all their new ventures, leaving the company with a relatively cash growth and balance. The company needs to make sure that they will always have enough hard currency in hand when things turn bad.



 Analyst Certification

I, Yosua Nainggolan, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or view expressed in this research report.

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