Yancoal's output growth potential is huge

Supported by the simultaneous increase in coal production and prices, Yanzhou Coal (1171)'s revenue jumped 63% year-on-year to *** 25 billion yuan in the first nine months of 2010, and its profit increased rapidly by 109% to *** 6.3 billion. yuan. As domestic coal prices continue to rise, coupled with the Australian floods affecting the local coal supply, so that the coal price is again stimulated, and the company's production capacity has growth momentum, so we are still optimistic about the prospects for Yanzhou Coal in 2011.

Structural bottlenecks affecting transportation will continue to be the main factor driving up coal prices. The National Development and Reform Commission issued a guidance framework for the allocation of inter-provincial coal railway transportation capacity in 2011, setting the goal of increasing coal capacity only to 2.8%. The increased capacity mainly comes from the Datong and Shenyu Huang railways, with a total capacity increase of 60 million tons. According to the government’s construction schedule, it is expected that other major railway transport projects, including Ji Zhang and the Shanxi Province Central and Southern Railways (from Luliang to Rizhao Port) will be opened to traffic in 2013 and 2014. We expect that the restrictions on railway transportation will be maintained until at least 2012.

Benefits from rising coal prices Yancoal has announced that it has signed a 2011 provincial coal sales contract at last year's price, providing 9 million tons of coal, and contracted sales have dropped by 10% year-on-year. Over 80% of the company's coal is sold at the spot price, and its peers China Shenhua (1088) and China Coal Energy (1898) are sold at spot prices at 55% and 30% respectively, so Yancoal will be able to incur coal prices. Rise for maximum benefit. Heavy rains and floods in Queensland, Australia, affected coal mines and coal infrastructure, resulting in limited supply and high prices. Australia is the world's largest coking coal exporter, accounting for more than 50% of global supply in 2008. In addition, Australia is also the second largest exporter of electric coal in the world, with a market share of 20% in 2008. Queensland is Australia's major coal producer, especially coking coal. In 2009, total production was 251 million tons, accounting for 58% of national production. Yancoal's only coal mine in Queensland has an annual capacity of 1.8 million tons, accounting for less than 10% of the company's total production capacity in Australia.

Yancoal is improving its coal sales mix by increasing the proportion of coking coal with higher average selling price and stronger profitability. The company acquired a 30% stake in the Ashton coal mine, which mainly produces semi-soft coal, and sold all 51% of the Minerva coal mine, which produces thermal coal. After the transaction, Yancoal's stake in Ashton will increase from 60% to 90%. At the same time, the proportion of non-electric coal production will increase from only 4% in 2009 to 18% in 2011.

The production of overseas mines into new power The strong production momentum will become another major source of profit for Yancoal in the next year or two. We estimate that the coal production in 2010 and 2011 will reach 46 million tons and 52 million tons, respectively, with year-on-year increases of 27% and 13%, respectively, and the majority are mainly from the Zhaolou Mine in Zhangze Nenghua and Australia. New production of the Moolarben mine. The company's equity reserves in Yung Shue Wan, Ordos and Haosheng coal mines were 510 million tons, 1.6 billion tons and 838 million tons, respectively.

The company has just entered into an agreement with Yankuang Group and Yanchang Petroleum to form a joint venture company. Yancoal will contribute RMB 1.35 billion with a 25% interest, and Yankuang Group and Yanchang Petroleum will hold 50% and 25% respectively. . The joint venture company will be engaged in the coal-to-oil conversion business and the development of the Jinjitan coal mine. The design and construction scale of the Jinjitan coal mine will be 8 million tons per year, and the recoverable reserves will be 1 billion tons, which can drive the company's production to grow steadily in the future. The majority of Yancoal's products are sold at spot prices, and the wide range of coal products provided, coupled with a huge growth potential, we reiterate our Buy rating on the company. The target price is 30.00 yuan, which is equivalent to 13 times the 2011 P/E ratio.