Yanzhou Coal gets ‘thumbs up’ from analysts who flag new mine output, rising prices
Yanzhou Coal Mining, the listed flagship of China’s fourth-largest coal miner, has seen its Hong Kong share price tumble 21 per cent from this year’s high, on the back of profit-taking and slumping coal price. But the pummelling in the share price could offer investors an ideal entry point, according to some analysts.
They cite the company’s strong production growth outlook, powered both by domestic and overseas mine development as well as an impending acquisition of a major producer in Australia, which will likely help it weather any further weakness in coal prices.
“Yanzhou is one of very few A-share coal miners that still have high production growth,” wrote China Merchants Securities lead analyst Lu Ping in a recent report. “The current coal price correction is normal given seasonal weaker demand ... once summer demand comes, prices are likely to rebound.”
He had a “strong buy” recommendation on the miner’s Shanghai-traded A-shares, which have fallen 13 per cent from this year’s high of 11.97 yuan in mid-April, citing an attractive valuation of 6.5 times this year’s estimated earnings.
Shandong-based Yanzhou’s management said in March it aimed to raise coal output by 29.2 per cent to 78.6 million tonnes this year, thanks in part to its new mines in Inner Mongolia and Australia.
An additional 12 million tonnes of output is expected to be added when the US$2.5 billion acquisition of mines from Australian global mining giant Rio Tinto is completed.
The deal, pending approval by Yanzhou’s shareholders and authorities in China and Australia, would make the company Australia’s third-largest coal reserve holder and producer, according to Beijing-based rating agency China Bond Rating. Yankuang Group is the parent company of Yanzhou.
Yanzhou’s Hong Kong-listed H-shares have dropped 21 per cent from its high in April, ending at HK$5.8 on Friday, its lowest level since early February.
This followed a sharp but brief rally in the first half of April after management announced a better-than-expected 10-fold profit jump for last year and gave a rosy production outlook for this year.
BOC International also had a positive view on the stock. Analyst Lawrence Lau early this month assigned a “buy” recommendation on its H-shares with a target price of HK$7.71.
“We still think Yanzhou can achieve a 13 per cent rise in the average selling price this year from last year to 443 yuan a tonne for output from its own mines,” he said in a report.
UOB Kay Hian analyst Shi Yan also shared the view that the current coal price weakness would not significantly impact the annual average price for Yanzhou, saying Beijing would keep tabs on miners’ output and alleviate oversupply given its “supply-side reform policy”.
The price of China’s “premium blend” benchmark coal with 5,500 kilo-calorific value has fallen around 10 per cent since early April to just over 600 yuan a tonne, according to a report by Jefferies.
Bucking the view of his peers, Jefferies’ analyst Laban Yu does not believe the supply control policy can be sustained for long, and is bearish on long term coal prices and Chinese coal mining stocks.
He believes Beijing’s intervention a year ago to prop up prices following a five-year bear market was designed to prevent mass bankruptcies and unemployment in the sector.
But Yu says the policy will not be sustainable because of the negative impacts on coal-fired power producers’ profitability and balance sheets.
“We believe life support for the coal industry cannot last past 2017 without damaging [power producers’] balance sheets and crippling power sector reform,” Yu said.
Coal-fired power producers last year suffered sharp profit falls due to higher coal costs, a lack of upward adjustment of state stipulated power tariffs, surging output of renewable energy and market-based pricing reforms.
The National Development and Reform Commission (NDRC) last year ordered all mines to operate no more than 276 days a year, cutting productive capacity by roughly 10 per cent.
The move helped to lift the premium blend coal price to around 720 yuan a tonne in November from around 380 yuan a tonne a year earlier. However, prices eased back in the subsequent months as the output restriction was gradually relaxed to allow the most efficient mines to resume normal production.
As coal output rebounds Yu believes benchmark prices will fall below 500 yuan a tonne in the second half to eventually settle around 400 yuan a tonne next year. The forecasts appear to assume that Beijing will refrain from further intervention to curtail supply next year.
The NDRC early this year said it wanted the benchmark coal price to remain in a range of 500 yuan to 570 yuan per tonne in 2017, and indicated its intention to intervene to keep prices within the range.
The commission has not indicated a price range target for next year.
If investors buy into Yu’ view on coal prices, they may want to head for utilities who are likely to benefit from weaker coal prices. Last year coal-fired power producers saw their gross profit tumble to its lowest level in five years.
Meanwhile, Credit Suisse analysts believe net profit for Yanzhou will more than triple by 2019, even as they expect the average benchmark coal price to fall from 575 yuan a tonne this year to 500 yuan next year and 450 yuan per tonne in 2019.