China China Coal Sectorpg.jrj.com.cn/acc/Res/CN_RES/INDUS/2014/4/17/1de057e4-84b7-4b3… · Metals & Mining Industry China Coal Sector Date 17 April 2014 Industry Update Short-lived

Deutsche Bank Markets Research

Asia China Resources Metals & Mining

Industry

China Coal Sector

Date 17 April 2014

Industry Update

Short-lived rebound

We remain bearish for coal; reiterating Sell for China Coal and Yanzhou

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Deutsche Bank AG/Hong Kong

Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 054/04/2013.

James Kan

Research Analyst (+852) 2203 6146 [email protected]

Top picks

China Shenhua Energy (1088.HK),HKD22.00

Hold

China Coal Energy (1898.HK),HKD4.39 Sell

Yanzhou Coal (1171.HK),HKD6.19 Sell

Source: Deutsche Bank

Companies Featured

China Shenhua Energy (1088.HK),HKD22.00

Hold

2013A 2014E 2015EP/E (x) 9.1 9.6 9.2EV/EBITDA (x) 5.6 5.8 5.4Price/book (x) 1.4 1.2 1.1

China Coal Energy (1898.HK),HKD4.39 Sell 2013A 2014E 2015EP/E (x) 15.7 23.2 15.6EV/EBITDA (x) 9.4 10.8 8.8Price/book (x) 0.5 0.5 0.5

Yanzhou Coal (1171.HK),HKD6.19 Sell 2013A 2014E 2015EP/E (x) 43.3 22.5 13.3EV/EBITDA (x) 9.0 8.8 7.5Price/book (x) 0.7 0.6 0.6Source: Deutsche Bank

Target prices upside/downside %

Company TP CP Up/down %

Shenhua 24.0 22.0 +9.1%

China Coal 3.3 4.39 -24.8%

Yanzhou 4.4 6.19 -28.9%


We believe any improved profitability for coal producers may easily melt away because of mounting supply pressure. Our research about capacity additions and competition leads us to believe market expectations for 2014 average QHD coal price and 2014 NPAT estimates for China Coal/Yanzhou Coal are still too high. We believe recent share price strengths are not well justified and reiterate our Sell ratings for China Coal/Yanzhou and maintain our Hold for Shenhua.

Mounting supply pressure in China remains In 2013, China NBS (National Bureau of Statistics) reported RMB526bn invested into the coal industry, an amount similar to that of 2012. The large number implies to us that there are still plenty of new capacities “queuing up“ to be ramped. As such, any price/profitability improvement will prompt supply recovery easily. The 2013 results summary of Chinese A/H listed coal companies also concerns us about the downward movement of cost curve as well as reacceleration of capex. Balance sheets of listed coal producers, though deteriorating in terms of net gearing, are not yet overly stretched. All these points can imply the bad battle for coal producers might not be over yet.

There is fierce competition among coal-producing countries Coal supply cost curves provided by Sxcoal/Wood Mackenzie demonstrates that there are plenty of cost competitive coal supplies. In 2014, there should be more than 800mt of thermal coal able to hit the QHD market (c. 640mt size) at a cash cost lower than RMB500/t (VAT included). Meanwhile, we believe c. 90% of Indonesia supply can still sustain at that price level. With the fierce competition, we believe Chinese import balance and the equilibrium coal prices will be very sensitive to currency and dry bulk shipping freight rate.

Coal price should weaken in coming months Based on historical seasonality and short-term demand/supply, we believe QHD coal price will start to weaken after completion of Daqin Line’s (major coal transport railway) maintenance in late April. Potentially weaker industry production in China and stronger hydro power generation in 2Q14 will also help to press QHD coal prices. We might not observe coal price recovery again until late 3Q14. Our research for coal railways shows that we might be facing another temporary coal price hike in 4Q14 because of seasonal railway transportation bottleneck. Yet, import might help to mitigate coal price hikes.

Reiterating Sell on China Coal and Yanzhou; maintaining Hold for Shenhua The coal price movement in coming months will crystallize the fact that market expectation for 2014 QHD price and coal companies’ NPATs are too high. We maintain our RMB530/t assumption for 2014/2015 QHD price forecasts. We believe the market is adopting c. RMB570-600/t for 2014/2015. Our 2014E NPATs for Shenhua/China Coal/Yanzhou are thus 13%/44%/41% lower than market consensus respectively. Maintaining Sell/Sell/Hold for China Coal/Yanzhou/Shenhua. Our target prices are set by DCF methods and major risk to our thesis is much stronger-than-expected China economy.

17 April 2014

Metals & Mining

China Coal Sector

Page 2 Deutsche Bank AG/Hong Kong

Short-lived rebound

Mounting supply pressure in China remains

In 2013, China NBS (National Bureau of Statistics) reported RMB526bn invested into the coal industry, an amount similar to that of 2012 (Figure 1 and Figure 2). The significant number implies that there is still plenty of new capacities “queuing up“ to be ramped. Looking into the details of investment into the coal industry in three major coal-producing provinces as shown in Figure 3 to Figure 5, we can see clearly the “mounting” supply pressure. We compare the production volume increase in each year with the capacity addition implied by FAI (fixed asset investment) into the coal industry in each province.

Figure 1: Implied capex to coal industry (Monthly) Figure 2: Implied capex to coal industry (YTD)

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Figure 3: Shanxi – incremental capacity vs. incremental

production

Figure 4: Shaanxi – incremental capacity vs. incremental

production

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17 April 2014

Metals & Mining

China Coal Sector

Deutsche Bank AG/Hong Kong Page 3

Figure 5: Inner Mongolia – incremental capacity vs.

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The gap between production volume increase and implied capacity addition continues to widen. Bear in mind that we have stripped out maintenance capex and also consider the per tonne cost inflation. We believe the gap implies a potentially low utilization rate of Chinese coal production capacity at the current moment. That should also imply in a scenario of profitability recovery for the coal mining industry that China would get plenty of available coal supplies to hammer coal miners’ profitability again.

We also conducted an exercise to observe what listed coal companies’ 2013 results reveal to us. The 2013 key results of Chinese A/H listed coal companies are summarized in Figure 6. Several key observations:

Production volume: only three companies reported production volume decline in 2013. Production cuts claimed by some industry analysts are not that obvious for listed companies.

Production cost per tonne: the majority of coal companies have YoY decline for their per tonne production cost. This might imply that supply cost curve has shifted downward.

ASP and EBITDA/t all went downward unsurprisingly.

Capex discipline: the majority of listed companies indeed cut their 2013 capex. However, based on their capex guidance or analysts’ forecasts, capex into coal assets might re-accelerate.

Net debt of most listed coal companies increased in 2013. However, net gearings are generally not high even after 2013 net debt hikes. The linear average net gearing of companies in our exercise is only 31%. This might imply that coal companies are still having plenty of “bullets” for further bloody competition.

17 April 2014

Metals & Mining

China Coal Sector


Figure 6: Result summary for A/H listed coal companies (FY13 vs. FY12 YoY comparison if not specified)

Company Ticker Location Prod. Vol. Prod Cost/t ASP EBITDA/t Capex Capex Net Debt 2013 net gearing YoY YoY YoY YoY YoY YoY 14E vs13 YoY % FY2013

Shenhua 1088 HK Shaanxi/Inner Mongolia 5% 5% -9% -21% -38% -19% 639% 13%China Coal 1898 HK Shanxi/Shaanxi 4% 3% -12% -27% -40% 32% 126% 47%Yanzhou Coal 1171 HK Shandong/Inner Mongolia/S 7% -10% -15% -17% 38% 3% 57% 94%Lu'an 601699 CH Shanxi 11% -14% -18% -40% -25% 105% 1126% 21%Xishan 000983 CH Shanxi 5% -14% -18% -24% -51% 68% 27% 64%Fushan 639 HK Shanxi 1% 3% -25% -32% -56% 100% net cash net cashYitai 3948 HK Inner Mongolia -8% -12% -14% -18% 92% -65% 221% 52%Huolinhe 002128 CH Inner Mongolia 3% -1% -13% -31% -7% -41% -25% 24%Haohua 601101 CH Beijing/Inner Mongolia 13% -1% -14% -44% -11% 6% -273% 13%Jingyuan 000552 CH Gansu -2% -6% -6% -12% -48% 89% -52% 5%Hidili 1393 HK Guizhou/Yunnan/Sichuan -56% 15% -26% -115% -44% -8% -8% 61%Zhengmei 600121 CH Henan 1% -7% -13% -14% -95% 51% -32% 38%Shanghai Energy 600508 CH Jiangsu 3% 4% -9% -53% 10% -39% 305% 20%Anyuan 600397 CH Jiangxi 8% -16% -18% -26% -9% na 43% 43%Hengyuan 600971 CH Anhui 2% -4% -11% -32% -54% na 1811% 7%

Number of companies having declining trend out of 15 3 10 15 15 12 5 5 na

Source: Deutsche Bank, Company data

All in all, we believe the result summary might help to back up our thesis that the industry is not yet bottoming out.

We therefore also update our demand/supply model for China coal industry (Figure 7). We believe the utilization rate for the coal industry will continue to be low in China. Meanwhile, because of import thermal coal cost competitiveness, we believe there is still room for China thermal coal net import to increase in 2014.

17 April 2014

Metals & Mining

China Coal Sector


Figure 7: China demand and supply balance for marketable coal (incl. lignite)

(mn tonnes) 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E 2015ETotal YE coal capacity 4,469 4,929 5,292 5,544 YoY (%) 11.1% 9.3% 6.9% 4.5%Theoretical Utilization rate 83.6% 78.8% 77.0%

Thermal coal supply 2,061 2,262 2,460 2,598 2,700 2,859 3,037 3,171 3,276 3,340 3,452 YoY (%) 9.8% 8.8% 5.6% 4.0% 5.9% 6.2% 4.4% 3.3% 1.9% 3.4%Met coal supply 438 484 513 519 534 576 617 629 653 688 717 YoY (%) 10.4% 6.0% 1.1% 2.8% 7.9% 7.1% 2.0% 3.8% 5.3% 4.3%Total domestic supply 2,500 2,746 2,974 3,117 3,234 3,435 3,654 3,800 3,929 4,027 4,169 YoY (%) 9.9% 8.3% 4.8% 3.8% 6.2% 6.4% 4.0% 3.4% 2.5% 3.5%

(mn tonnes) 2,005 2,006 2,007 2,008 2,009 2,010 2,011 2,012 2013E 2014E 2015EPower 1,038 1,181 1,322 1,359 1,461 1,645 1,859 1,896 2,012 2,074 2,162 YoY (%) 13.8% 11.9% 2.8% 7.5% 12.6% 13.0% 2.0% 6.1% 3.1% 4.3%Met coal demand 440 484 517 523 568 622 658 681 727 744 782 YoY (%) 10.0% 6.7% 1.1% 8.6% 9.5% 5.8% 3.6% 6.6% 2.2% 5.2%Cement 146 174 194 198 235 268 311 334 366 390 412 YoY (%) 18.6% 11.6% 2.4% 18.4% 13.8% 16.1% 7.4% 9.6% 6.7% 5.6%Heating 199 205 211 217 224 230 234 246 251 256 261 YoY (%) 3.0% 3.0% 3.0% 3.0% 2.5% 2.0% 5.0% 2.0% 2.0% 2.0%Fertilizer/Chemical 70 75 80 86 92 98 112 120 127 146 163 YoY (%) 7.0% 7.0% 7.0% 7.0% 7.0% 13.8% 7.1% 5.6% 15.0% 12.0%Village demand 111 111 110 108 107 106 104 103 101 100 98 YoY (%) 0.0% -1.2% -1.2% -1.2% -1.2% -1.5% -1.5% -1.5% -1.5% -1.5%Others 450 491 538 620 651 632 584 700 665 645 626 YoY (%) 9.3% 9.4% 15.2% 5.1% -2.9% -7.7% 19.9% -5.0% -3.0% -3.0%Total domestic demand 2,455 2,722 2,972 3,112 3,337 3,600 3,861 4,079 4,249 4,354 4,504 YoY (%) 10.9% 9.2% 4.7% 7.3% 7.9% 7.2% 5.7% 4.1% 2.5% 3.5% Thermal coal demand 2,015 2,237 2,455 2,589 2,770 2,978 3,203 3,398 3,521 3,610 3,722 YoY (%) 11.1% 9.7% 5.5% 7.0% 7.5% 7.6% 6.1% 3.6% 2.5% 3.1%

Net import (export) for Thermal (47) (25) (6) (8) 70 119 166 227 245 270 270 Net import (export) for Met 2 0 4 3 34 46 41 52 74 56 65

QHD 5500kcal (FOB VAT-included) 426 427 468 720 600 746 819 707 589 530 530 Liulin No.4 (FOR VATincluded) 1,520 1,271 1,482 1,675 1,455 1,142 1,000 1,100

Demand growth remain weak in 2014

Net import is a plug. We believe the net import for thermal coal will still grow as Indonesia coal remain very competitive.

We believe capacity addition is greater than production volume increase. Hence, utilization rate will continue to go down.

Coking coal supply increase should be strong in 2014.

Source: Deutsche Bank, Wood Mackenzie, Sxcoal

Still fierce competition among coal-producing countries

As we pointed out in our FITT report Chindo coal – still racing to the bottom published on 18 November 2013, we believe the competition among major coal-producing countries will continue to press coal price. Our recent research about coal supply cost curves provided by Sxcoal/Wood Mackenzie demonstrates that there are plenty of cost competitive coal supplies.

As shown in Figure 8, in 2014, there should be more than 800mt of thermal coal able to hit the QHD market (c. 640mt size) at a cash cost lower than RMB500/t (VAT included). Meanwhile, we believe c. 90% of Indonesia supply can still sustain at that price level.

17 April 2014

Metals & Mining

China Coal Sector


Figure 8: Cost curve of domestic coal delivered to

northern ports in 2014

Figure 9: Cost curve of Indonesia coal delivered to

Guangzhou Port in 2013/2014

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2014 Indonesia coal supply is even more competitive than 2013

Source: Deutsche Bank, Sxcoal, Company data Source: Deutsche Bank, Wood Mackenzie, Sxcoal

Meanwhile, with the fierce competition, we believe Chinese import balance and the equilibrium coal prices will be very sensitive to currency and dry bulk shipping freight rate.

Figure 10: Exchange rate AUD/CNY Figure 11: Exchange rate IDR/CNY

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Figure 12: BDIY vs. China domestic freight rate

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17 April 2014

Metals & Mining

China Coal Sector


Coal price should weaken in coming months

We believe coal price will weaken in coming months for several reasons:

Potentially weakening industrial production (Figure 13) – with recent poor property sales momentum, we are concerned about steel production (and industrial production) growth in 2Q14. As such, potentially the demand growth for thermal coal will slow too.

Hydro power generation coming back (Figure 14) – good dam reservoir water situation seems to indicate good hydro power generation growth in coming months.

Summer destocking for IPPs (Figure 15 to Figure 18) – historically, IPP restock in April/May and destock in summer from June to August. In the past two years, when coal oversupply was an issue, IPP restocking did not push up the coal price much. But when IPPs did destock in the summer, the coal price weakened. This year, Daqin Line maintenance was pushed to earlier in April. That maintenance has tightened demand/supply in April and lifted the coal price a bit. We believe there is a good chance that the coal price will weaken once Daqin maintenance is completed.

Import/domestic price parity (Figure 19 and Figure 20) - at the current price, imported coal is at least NOT unfavorable. Thus, QHD coal price, when benchmarked with import coal prices, does not have a reason to maintain a good uptrend.

17 April 2014

Metals & Mining

China Coal Sector


Figure 13: Property sales vs. crude steel production

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Floor space sold leading crude steel production YoY by about 2-3 months

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Figure 14: Hydro power generation (Monthly) vs. Dam reservoir change

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17 April 2014

Metals & Mining

China Coal Sector


Figure 15: IPP inventory days vs. QHD price (2014 YTD) Figure 16: IPP inventory days vs. QHD price (2013)

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Figure 17: IPP inventory days vs. QHD price (2012) Figure 18: IPP inventory days vs. QHD price (2011)

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Figure 19: Implied price parity vs. net import – thermal

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Figure 20: Landed price parity vs. net import – thermal

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Source: Deutsche Bank, Sxcoal, Custom data, Wind Source: Deutsche Bank, Sxcoal, Custom data, Wind

17 April 2014

Metals & Mining

China Coal Sector


We might observe coal price recovery again but not until late 3Q14. Our research for coal railways (Figure 21) shows that we will have about 7% YoY growth for coal railway capacity in 2014. However, the coal transportation volume volatility in a year can be as high as almost 20% (Figure 22). As such, in 4Q14, the seasonal spike for transportation might still lead to another temporary coal price hike as happened in 4Q13. Nevertheless, low cost (lower than in 2013) coal import might help to mitigate coal price hikes in 4Q14.

Figure 21: Coal railway capacity summary Lines (Mtpa) 2010 2011 2012 2013 2014E 2015E

Northern

Daqin (大秦线) Datong - Qinhuangdao (大同-秦皇岛) 400 440 450 450 460 460

Shuohuang (朔黄线) Shuozhou - Huanghua (朔州-黄骅) 165 180 210 250 280 300

Fengshada (丰沙大) Shacheng - Fengtai (沙城-丰台) 20 20 20 30 40 40

Jingyuan (京原线) Yuanping - Shijingshan (原平-石景山) 20 20 25 25 25 25

Jitong (集通线) Jining-Tongliao (集宁-通辽) 20 30 40 50 50 50

Zhangtang (张唐) Zhangjiakou-Caofeidian (张家口-曹妃甸) - - - - - 30

Mengxi-Huazhong (蒙西-华中) Haolebaoji - Ji'an (浩勒报吉-吉安) - - - - - -

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Shitai (石太线) Taiyuan - Shijiazhuang (太原-石家庄) 65 80 90 100 100 100

Hanchang-Hanji (邯长-邯济) Changzhi - Handan - Jinan (长治-邯郸-济南) 20 20 20 20 40 60

Shanxi central-southern (晋中南) Lvliang - Rizhao (吕梁-日照) - - - - 10 50

Southern

Houyue (侯月线) Houma - Yueshan (侯马-月山) 100 100 100 100 100 100

Taijiao (太焦线) Taiyuan-Jiaozuo (太原-焦作) 70 70 70 70 70 70

Xikang (西康线) Xi’an-Ankang (西安-安康) 10 10 20 20 20 40

Ningxi (宁西线) Xi’an - Nanjing (西安-南京) 22 22 22 22 22 22

Longhai (陇海线) Lanzhou - Lianyungang (兰州-连云港) 15 20 20 30 40 40

Subtotal “Three West” 927 1,012 1,087 1,167 1,257 1,387

Net addition 65 85 75 80 90 130

Eastern Inner Mongolia

Tonghuo (通霍线) Tongliao - Huolinhe (通辽-霍林河) 80 110 110 110 110 110

Chidabai - Jinchi (赤大白-锦赤) Baiyinhua - Chifeng -Jinzhou (白音华-赤峰-锦州) 20 20 30 50 50 50

Chisui (赤绥线) Chifeng-Suizhong (赤峰-绥中) - - - - - -

Baxin (巴新线) Bayanwula - Fuxin (巴彦乌拉-阜新) - - - - 5 10

Subtotal 100 130 140 160 165 170

Net addition 20 30 10 20 5 5

Total 1,027 1,142 1,227 1,327 1,422 1,557

YoY% 9% 11% 7% 8% 7% 9%

Net addition 85 115 85 100 95 135 Source: Deutsche Bank estimates, Wood Mackenzie

17 April 2014

Metals & Mining

China Coal Sector


Figure 22: Seasonal fluctuation of monthly coal volume transported by railway

12.2%18.0% 18.9% 14.6%

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2010 2011 2012 2013

Lowest monthly coal vol. transported by railway/average

Highest monthly coal vol. transported by railway/average

Coal volume transported by railway shows seasonal fluctuation of 12-19%


Figure 23: Railway map for coal transportation

Ji'an

Caofeidian

Nanjing

Zhongwei

Three-west existing lines

Three-west new lines

Xinjiang lines

Eastern Inner Mongolia lines

Intra lines

ShiTaiTaiyuan Shijiazhuang

Suizhong

FengningJining

Yinchuan

Xinlinhaote

XiDuo-DuoFeng

Xi'an

Ankang

XiKang

HoumaYueshan

Jiaozuo

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Rizhao

Qingdao

Lianyungang

Gansu

Inner Mongolia

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Qinghai

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HunanJiangxi

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Guizhou

Shanghai

Hebei

Henan

Shangdong

Anhui

Liaoning

Jilin

Heilongjiang

BeijingTianjin

Tongliao

Huolinhe

TongHuo

Jinzhou

Baiyinhua

Chifeng

ChiSui

Bayanwula

BaXin

Fuxin

Lanzhou

DatongDaQin QHD

Baotou

Jiangjunmiao

WulumuqiHami

Chengdu

Linhe

Changzhi JinanHanChang-HanJi

TaiZhongYin

Bao Xi

Dongsheng

Shuozhou ShuoHuangShenmu

HuanghuaZhunge'er

Zhangjiakou

Duolun

Hohhot

Ceke

Haolebaoji


17 April 2014

Metals & Mining

China Coal Sector


Reiterating Sell on China Coal/Yanzhou; maintaining Hold for Shenhua

The coal price movement in coming months will crystallize the fact that market expectation for 2014 QHD price and coal companies NPATs are too high. We maintain our RMB530/t assumption for 2014/2015 QHD price forecasts.

Figure 24: Shenhua’s PEx sensitivity against QHD prices Shenhua (1088.HK) QHD FOB 5500 (RMB/t) PEx at current price HK$22

2014E 2015E 2014E 2015E

Bear case

450 450 12.2 11.8

470 470 11.4 11.0

490 490 10.7 10.3

510 510 10.1 9.7

Base case 530 530 9.6 9.2

Bull case

550 550 9.1 8.7

570 570 8.6 8.2

590 590 8.2 7.8

610 610 7.9 7.5

Consensus 8.3 8.0 Source: Deutsche Bank estimates

Figure 25: China Coal’s PEx sensitivity against QHD prices China Coal (1898.HK) QHD FOB 5500 (RMB/t) PEx at current price HK$4.39

2014E 2015E 2014E 2015E

Bear case

450 450 na na

470 470 na 63.0

490 490 75.1 31.3

510 510 35.5 20.9

Base case 530 530 23.2 15.6

Bull case

550 550 17.3 12.5

570 570 13.8 10.4

590 590 11.4 8.9

610 610 9.8 7.8


Figure 26: Yanzhou’s PEx sensitivity against QHD prices Yanzhou (1171.HK) QHD FOB 5500 (RMB/t) PEx at current price HK$6.19

2014E 2015E 2014E 2015E

Bear case

450 450 131.0 31.9

470 470 59.4 23.7

490 490 38.4 18.8

510 510 28.4 15.6

Base case 530 530 22.5 13.3

Bull case

550 550 18.6 11.6

570 570 15.9 10.3

590 590 13.9 9.3

610 610 12.3 8.4


17 April 2014

Metals & Mining

China Coal Sector


Based on the PEx sensitivity analysis we conducted for Shenhua, China Coal, and Yanzhou as shown in Figure 24 to Figure 26, we believe the market is adopting c. RMB570-600/t QHD coal price assumptions for 2014/2015. We believe that assumptions should be too optimistic.

Based on our RMB530/t coal price assumptions, our 2014E NPATs for Shenhua/China Coal/Yanzhou are thus 13%/44%/41% lower than market consensus respectively. How our NPAT estimates differ from Bloomberg Finance LP market consensus is shown in Figure 27 to Figure 29.

Fundamentally, we still prefer Shenhua over China Coal and Yanzhou. Shenhua’s earnings contribution from coal business will be less than 50% since 2014. The company’s IPP/railway assets will let the company’s bottom line be more resilient than its peers.

We are concerned about China Coal’s inflating transportation costs. The railway transportation industry seems to be beginning to claim more value from the coal producing industry, evidenced by Daqin Railway’s freight rate hike. As such, China Coal’s bottom line can be quite venerable to structural changes.

For Yanzhou, our concerns remain on the company’s high cost/low profitability operations in Australia and the company’s ability to maintain its deflated cost.

All in all, we reiterate our Sell for China Coal/Yanzhou and our Hold for Shenhua.

Figure 27: Shenhua’s Deutsche Bank earnings estimates vs. consensus RMB m 2014E 2015E

DBe Cons. DBe/Cons. DBe Cons. DBe/Cons.

Revenue 270,069 266,767 101% 283,389 280,524 101%

OP 57,908 66,689 87% 60,305 68,865 88%

NP 36,663 41,985 87% 38,310 42,940 89%Source: Deutsche Bank estimates, Bloomberg Finance LP

Figure 28: China Coal’s Deutsche Bank earnings estimates vs. consensus RMB m 2014E 2015E

DBe Cons. DBe/Cons. DBe Cons. DBe/Cons.

Revenue 81,430 83,833 97% 94,538 88,885 106%

OP 4,151 6,102 68% 5,921 6,859 86%


Figure 29: Yanzhou Coal’s Deutsche Bank earnings estimates vs. consensus RMB m 2014E 2015E

DBe Cons. DB/Cons. DBe Cons. DB/Cons.

Revenue 52,114 55,135 95% 55,476 58,800 94%

OP 2,821 3,359 84% 3,857 4,114 94%


17 April 2014

Metals & Mining

China Coal Sector


Valuations and risks

Our target prices are set by DCF methods and major risk to our thesis is much stronger-than-expected China economy.

Shenhua Our Shenhua target price of HKD24.0 is based on an SOTP approach with DCF to value the separate businesses. We value the coal business with life-of-mine DCF. We adopt 7.6% as the cost of capital for Shenhua, reflecting a risk-free rate of 4.3%, a market risk premium of 5.6% and beta of 0.9.

The stock currently trades at 9.5x our 2014E EPS and 1.18x our 2014E BVPS. The target price implies 10.4x 2014E our EPS and 1.29x 2014E our BVPS. With the current share price implying 9% upside potential, we maintain our Hold for Shenhua.

Figure 30: Shenhua's forecast change table RMBm 2014E 2015E

New Old Change% New Old Change%

Revenue 270,069 240,568 12.3% 283,389 251,952 12.5%

OP 57,908 61,390 -5.7% 60,305 63,280 -4.7%

NP 36,663 38,529 -4.8% 38,310 39,895 -4.0%Source: Deutsche Bank estimates

Figure 31: Shenhua 12-month forward PBx vs. ROAE

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Risks:

Key downside risks: 1) a substantial demand slowdown or significantly higher-than-expected supply growth; and 2) accidents in mine operations and delays in mines under development.

Key upside risks: 1) a better demand recovery driven by stronger-than-expected stimulus; and 2) higher-than-expected market prices if major producers control coal supply efficiently.

Company-specific risks: 1) weaker/stronger-than-expected ASP realization; 2) higher/lower-than-expected unit cost; and 3) weaker/stronger-than-expected volume growth.

17 April 2014

Metals & Mining

China Coal Sector


China Coal Our China Coal target price of HKD3.3 is based on an SOTP approach with DCF to value the separate businesses. We value the coal business with life-of-mine DCF. We adopt 8.8% as the cost of capital for China Coal, reflecting a risk-free rate of 4.3%, a market risk premium of 5.6% and beta of 1.4.

The stock currently trades at 23.2x our 2014E EPS and 0.52x our 2014E BVPS. The target price implies 17.4x our 2014E EPS and 0.39x our 2014E BVPS. With the current share price implying 25% downside potential, we maintain our Sell for China Coal.

Figure 32: China Coal’s 12-month forward PBx vs. ROAE

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Risks:


Company-specific risks 1) lower-than-expected unit cost/volume growth; 2) better-than-expected ASP realization; and 3) favorable asset injections from the parent company.

17 April 2014

Metals & Mining

China Coal Sector


Yanzhou Coal Our Yanzhou Coal target price of HKD4.4 is based on an SOTP approach with DCF to value the separate businesses. We value the coal business with life-of-mine DCF. We adopt 7.6% as the cost of capital for Yanzhou Coal, reflecting a risk-free rate of 4.3%, a market risk premium of 5.6% and beta of 1.2.

The stock currently trades at 22.4x our 2014E EPS and 0.59x our 2014E BVPS. The target price implies 16.0x our 2014E EPS and 0.42x our 2014E BVPS. With the current share price implying 29% downside potential, we maintain our Sell for Yanzhou Coal.

Figure 33: Yanzhou Coal’s 12-month forward PBx vs. ROAE

Average

+1 SD

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Risks:


Company-specific risks 1) better-than-expected seaborne coking coal price; 2) less-than-expected exposure to FX risks after overseas project acquisition; 3) higher-than-expected gross margin of production from new mines in Inner Mongolia and Australia; and 4) higher-than-expected gross margin of production from new mines.

17 April 2014

Metals & Mining

China Coal Sector


Appendix 1

Important Disclosures Additional information available upon request Disclosure checklist

Company Ticker Recent price* Disclosure

China Shenhua Energy 1088.HK 21.95 (HKD) 16 Apr 14 14,15

China Coal Energy 1898.HK 4.40 (HKD) 16 Apr 14 14,15

Yanzhou Coal 1171.HK 6.20 (HKD) 16 Apr 14 1 *Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies

Important Disclosures Required by U.S. Regulators

Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States. See Important Disclosures Required by Non-US Regulators and Explanatory Notes.

1. Within the past year, Deutsche Bank and/or its affiliate(s) has managed or co-managed a public or private offering for this company, for which it received fees.

14. Deutsche Bank and/or its affiliate(s) has received non-investment banking related compensation from this company within the past year.

15. This company has been a client of Deutsche Bank Securities Inc. within the past year, during which time it received non-investment banking securities-related services.

Important Disclosures Required by Non-U.S. Regulators

Please also refer to disclosures in the Important Disclosures Required by US Regulators and the Explanatory Notes.

1. Within the past year, Deutsche Bank and/or its affiliate(s) has managed or co-managed a public or private offering for this company, for which it received fees.

For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr Analyst Certification

The views expressed in this report accurately reflect the personal views of the undersigned lead analyst about the subject issuers and the securities of those issuers. In addition, the undersigned lead analyst has not and will not receive any compensation for providing a specific recommendation or view in this report. James Kan

17 April 2014

Metals & Mining

China Coal Sector


Historical recommendations and target price: China Shenhua Energy (1088.HK) (as of 4/16/2014)

1

2 3

45

6

7

8

9 10

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Apr 12 Jul 12 Oct 12 Jan 13 Apr 13 Jul 13 Oct 13 Jan 14

Sec

uri

ty P

rice

Date

Previous Recommendations

Strong Buy Buy Market Perform Underperform Not Rated Suspended Rating

Current Recommendations

Buy Hold Sell Not Rated Suspended Rating

*New Recommendation Structure as of September 9,2002

1. 14/06/2012: Buy, Target Price Change HKD30.80 6. 02/06/2013: Downgrade to Hold, Target Price Change HKD27.10

2. 19/10/2012: Buy, Target Price Change HKD37.30 7. 25/06/2013: Upgrade to Buy, Target Price Change HKD27.20

3. 05/11/2012: Buy, Target Price Change HKD37.10 8. 04/07/2013: Buy, Target Price Change HKD26.40

4. 06/03/2013: Buy, Target Price Change HKD32.60 9. 29/08/2013: Buy, Target Price Change HKD26.00

5. 09/04/2013: Buy, Target Price Change HKD30.80 10. 28/10/2013: Downgrade to Hold, Target Price Change HKD24.50

Historical recommendations and target price: China Coal Energy (1898.HK) (as of 4/16/2014)

12

34

5

6

78

9

10

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1. 14/06/2012: Hold, Target Price Change HKD7.40 6. 02/06/2013: Hold, Target Price Change HKD4.90



4. 06/03/2013: Hold, Target Price Change HKD7.00 9. 25/09/2013: Downgrade to Sell, HKD4.00

5. 09/04/2013: Hold, Target Price Change HKD6.90 10. 18/03/2014: Sell, Target Price Change HKD3.30

17 April 2014

Metals & Mining

China Coal Sector


Historical recommendations and target price: Yanzhou Coal (1171.HK) (as of 4/16/2014)

12 3 4

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3. 19/08/2012: Downgrade to Sell, Target Price Change HKD9.80 10. 28/10/2013: Upgrade to Hold, Target Price Change HKD7.70

4. 05/11/2012: Sell, Target Price Change HKD9.30 11. 17/11/2013: Downgrade to Sell, Target Price Change HKD5.50

5. 06/03/2013: Sell, Target Price Change HKD9.10 12. 15/01/2014: Sell, Target Price Change HKD4.50

6. 09/04/2013: Sell, Target Price Change HKD9.00 13. 06/04/2014: Sell, Target Price Change HKD4.40

7. 02/06/2013: Sell, Target Price Change HKD7.00

Equity rating key Equity rating dispersion and banking relationships

Buy: Based on a current 12- month view of total share-holder return (TSR = percentage change in share price from current price to projected target price plus pro-jected dividend yield ) , we recommend that investors buy the stock. Sell: Based on a current 12-month view of total share-holder return, we recommend that investors sell the stock Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell. Notes:

1. Newly issued research recommendations and target prices always supersede previously published research. 2. Ratings definitions prior to 27 January, 2007 were:

Buy: Expected total return (including dividends) of 10% or more over a 12-month period Hold: Expected total return (including dividends) between -10% and 10% over a 12-month period Sell: Expected total return (including dividends) of -10% or worse over a 12-month period

55 %

39 %

6 %26 %

23 %14 %

050

100150200250300350400450

Buy Hold Sell

Asia-Pacific Universe

Companies Covered Cos. w/ Banking Relationship

17 April 2014

Metals & Mining

China Coal Sector


Regulatory Disclosures

1. Important Additional Conflict Disclosures

Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.

2. Short-Term Trade Ideas

Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the SOLAR link at http://gm.db.com.

3. Country-Specific Disclosures

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China China Coal Sectorpg.jrj.com.cn/acc/Res/CN_RES/INDUS/2014/4/17/1de057e4-84b7-4b3… · Metals & Mining Industry China Coal Sector Date 17 April 2014 Industry Update Short-lived