20181028-高盛-兖州煤业-600188.SH-Earnings_Review__3Q18A_below_expectations_driven_mostly_by_one-offs__core_operations_on_track_–_maintain_10页_533kb

Yanzhou Coal Mining Summary

Core Content

Yanzhou Coal Mining (1171.HK, 600188.SS) reported its third quarter of 2018 (3Q18A) results, which fell below expectations primarily due to one-off costs and delayed recovery in non-headquarter (non-HQ) China operations. Despite this, the company's core operations in HQ and YAL remained on track, with stable or improved performance in key metrics. The report maintains a "Buy" rating with unchanged 12-month price targets.

Key Financial Performance

• 3Q18A Net Profit (PRC GAAP): Rmb1.16bn, down 28% YoY and 45% QoQ.
• 9M18A Net Profit (PRC GAAP): Rmb5.5bn, representing 63% of the full-year 2018E Bloomberg consensus and 57% of GS 2018E estimates.
• Recurring Net Profit (3Q18A): Rmb1.92bn, nearly flat QoQ and up 54% YoY, adjusted for FX loss, one-off expenses, and higher tax rates.
• Price Targets:
  • 12-month target for Yanzhou-H: HK$12.0 (Upside: 36.7%).
  • 12-month target for Yanzhou-A: Rmb14.6 (Upside: 29.4%).
• Market Cap: HK$43.1bn / $5.5bn.
• Enterprise Value: HK$124.5bn / $15.9bn.

Key Drivers and Factors

• Core Operations (HQ and YAL):
  • HQ sales volume: 8.2mnt (3Q18A), up 4% YoY.
  • HQ ASP: Rmb585/t, stable YoY and QoQ.
  • YAL sales volume: 8.6mnt (3Q18A), up 80% YoY.
  • YAL ASP: Rmb644/t, up 23% YoY and 3% QoQ.
• Non-HQ China Operations (Haosheng and Ordos Nenghua):
  • Haosheng: Gross profit fell to a loss of Rmb328mn in 3Q18A, down 291% YoY.
  • Ordos Nenghua: Gross profit dropped to Rmb70mn in 3Q18A, down 79% YoY.
  • Both segments were affected by lower volumes, surging unit costs, and operational disruptions.
• Revisions to Earnings Forecasts:
  • Revised 2018E Net Profit down by 9.2% (or 3.0% on recurring basis).
  • 2019E and 2020E forecasts remain mostly unchanged, assuming recovery in non-HQ operations.

Key Risks and Upside Opportunities

• Upside Risks:
  • Higher coal prices, driven by tighter supply in the Chinese market.
  • Swift recovery in non-HQ China operations.
• Downside Risks:
  • Lower coal prices or price control by NDRC.
  • Additional unexpected costs from government policies on environmental and resource issues.
  • Delays in mining license approvals or production disruptions due to safety and environmental inspections.

Outlook and Recovery Expectations

• The report expects a significant improvement in 4Q18E, driven by:
  • Higher ASP.
  • Normalization of expenses and tax rates.
  • Partial recovery in non-HQ China operations.
• It anticipates nearly Rmb300mn QoQ improvement in profit from Ordos Nenghua and Haosheng.
• The safety inspection in Shandong is expected to have a marginal impact, leading to a 0.32% reduction in full-year 2018E earnings.

Price Target Methodology

• Based on historical P/B vs. ROE correlation.
• 2019E P/B: 0.86X/1.20X at an ROE of 15.2%.
• 2018E P/B: 0.82X/1.19X at an ROE of 15.1%.

M&A and Investment Context

• M&A Rank: 3 (low probability of acquisition).
• GS Factor Profile:
  • Growth: Based on forward-looking sales, EBITDA, and EPS growth.
  • Financial Returns: Based on ROE, ROCE, and CROCI.
  • Multiple: Based on P/E, P/B, and EV/EBITDA.
• Quantum: Goldman Sachs' proprietary database for financial analysis.
• GS SUSTAIN: A global investment strategy focusing on long-term alpha through identifying high-quality industry leaders.

Analysts and Disclosures

• Analysts: Trina Chen and Yijian Zhang.
• Disclosures:
  • Goldman Sachs has and expects to receive compensation for investment banking services related to Yanzhou Coal Mining.
  • The report includes a warning about potential conflicts of interest and that it should be considered as a single factor in investment decisions.

Summary of Key Metrics

Summary of Key Assumptions and Forecasts

• NEWC6000: Expected to rise to Rmb108/t in 2018E and Rmb98/t in 2019E.
• Seaborne PCI: Expected to rise to Rmb137/t in 2018E and Rmb114/t in 2019E.
• QHD5500 blended: Expected to remain at Rmb595/t in 2018E and Rmb590/t in 2019E.
• China PCI (w VAT): Expected to rise to Rmb985/t in 2018E and Rmb948/t in 2019E.
• Sales - self mined: Expected to increase to 94.5mnt in 2018E and 104.4mnt in 2019E.
• Unit EBITDA-self (US$/t): Expected to rise to US$29/t in 2018E and US$23/t in 2019E.
• EBITDA (Rmb mn): Expected to rise to Rmb24,035 in 2018E and Rmb22,585 in 2019E.
• Net Profit (Rmb mn): Expected to rise to Rmb8,961 in 2018E and Rmb8,679 in 2019E.
• ROE (%): Expected to be 17.7% in 2018E and 15.2% in 2019E.
• ROE-recurring (%): Expected to be 17.8% in 2018E and 15.2% in 2019E.
• ROIC (%): Expected to be 11.6% in 2018E and 10.5% in 2019E.

Conclusion

Despite the underperformance in 3Q18A due to one-off costs and delayed recovery in non-HQ operations, Yanzhou Coal Mining's core operations remain robust. The report maintains a "Buy" rating with unchanged price targets, highlighting the potential for improved earnings in 4Q18E and the long-term outlook for the company.