China Coal Energy. 1Q14 results miss - Guidance for 1H14 to fall

Transcription

1 China Coal Energy 1Q14 results miss - Guidance for 1H14 to fall China Coal Energy (CCE) s 1Q14 result was in-line with our forecast but likely missed consensus estimates. The company provided guidance for a decrease in 1H14 profits. While the stock trades near historical lows at 0.5x PB, with likely Street downgrades, negative FCF and a deterioration in the balance sheet likely to continue, we stay N rated. 1Q14 results miss. CCE s 1Q14 net income (under IFRS) of RMB614m (-67% yoy) represented 26% of our FY14 forecasts, but likely missed consensus (18% of FY14 estimates). Gross fell 18% yoy as lower unit cost (-6% yoy) failed to offset ASP fall (-10% yoy) and lower sales volume (-9% yoy). Unit cost control was above expectation, but impact of recent hike in railway tariffs (effective Feb 15) and maintenance costs are 2H skewed. Balance sheet remained stressed with negative OCF (- RMB4.1Bn) and FCF (-RMB9.4Bn) pushing net gearing (ND/E) higher to 54% (48% 2013). We note that 1Q finance cost spiked to RMB387m (+764% yoy, 62% qoq). At this point, we keep forecasts unchanged. Guidance for 1H14 to fall. CCE provided guidance for a decrease in net profit for 1H14 reflecting prolonged low coal prices. This implies 1H14 net income may fall short of RMB1.3Bn (1H13: RMB2.7Bn), highlighting risk to consensus FY14 estimates of RMB3.3Bn, in our view. CCE did not alter its FY14 targets (5% rise revenue, 5% rise in raw coal output, unit costs increase within 5%, capex RMB26.6Bn) but 1Q14 results suggest CCE is behind revenue (1Q14-16%) and production (1Q14 +1%) targets while costs (1Q14-6%) are ahead of plan. Retain N rating, H-share PT cut to HKD4.00. Trading at 0.5x PB for 3% ROE, CCE s valuation looks fair to us but we see headwinds from likely continued Street downgrades and a weakening balance sheet. Our PT of HKD4.00 equates to 18x FY14 PE and 0.5x PB. Stay N. China Coal Energy (Reuters: SS, 1898.HK; Bloomberg: CH, 1898 HK) Rmb in mn, year-end Dec FY12A FY13A FY14E FY15E FY16E Revenue (Rmb mn) 87,292 82,316 79,913 87,253 93,415 Net Profit (Rmb mn) 8,842 3,805 2,406 2,559 3,762 EPS (Rmb) DPS (Rmb) Revenue growth (%) (3.9%) (5.7%) (2.9%) 9.2% 7.1% EPS growth (%) (11.2%) (57.0%) (36.8%) 6.4% 47.0% ROCE 7.8% 3.4% 2.3% 2.7% 3.3% ROE 10.4% 4.4% 2.7% 2.8% 4.1% P/E (x) -A Share P/E (x) -H Share P/BV (x) -A Share P/BV (x) -H Share EV/EBITDA (x) Dividend Yield -A Share 5.0% 1.9% 1.3% 1.4% 2.0% Dividend Yield -H Share 6.2% 2.4% 1.6% 1.7% 2.5% Source: Company data, Bloomberg, J.P. Morgan estimates HK, 1898 HK Neutral Price: HK$4.18 Price Target: HK$ SS, CH Neutral Price: Rmb4.21 Price Target: Rmb4.30 China Asia Metals and Mining Daniel Kang AC Bloomberg JPMA KANG <GO> Waiyin Karen Li, CFA (852) waiyin.karen.li@jpmorgan.com J.P. Morgan Securities (Asia Pacific) Limited Price Performance HK$ 4 Apr-13 Jul-13 Oct-13 Jan-14 Apr HK HSI Index (rebased) Source: Bloomberg, J.P. Morgan. YTD 1m 3m 12m Abs Rel A-shares H-shares Shares O/S 13,259 13,259 Market Cap Rmb55,819 Rmb44,679 Market Cap $8,930 $7,148 Price Rmb4.21 HK$4.18 Date Of Price 25 Apr Apr 14 Free Float(%) 43.4% 43.4% 3M - Avg daily vol M - Avg daily val M - Avg daily val $6.6 $17.8 SSEA , Exchange Rate Price Target End Date 31-Dec Dec-14 See page 12 for analyst certification and important disclosures, including non-us analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, 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.

2 Key catalyst for the stock price: Upside risks to our view: Downside risks to our view: Coal price bottoming, summer restocking and production cuts from marginal players. (Positive) Deteriorating balance sheet (Negative). Stronger-than-expected coal prices Lower-than-expected unit cost/capex Faster-than-expected additions in coal production Weaker-than-expected coal prices Higher-than-expected cost pressure/capex Slower-than-expected additions in coal production Key financial metrics FY12A FY13A FY14E FY15E FY16E Revenues (LC) 87,292 82,316 79,913 87,253 93,415 Revenue growth (%) -3.9% -5.7% -2.9% 9.2% 7.1% EBITDA (LC) 17,234 13,007 13,154 16,383 20,259 EBITDA margin (%) 19.7% 15.8% 16.5% 18.8% 21.7% Tax rate (%) 25.1% 27.8% 25.0% 25.0% 25.0% Net profit (LC) 8,842 3,805 2,406 2,559 3,762 EPS (LC) EPS growth (%) -11.2% -57.0% -36.8% 6.4% 47.0% DPS (LC) BVPS (LC) Operating cash flow (LC mn) 10,887 6,788 9,635 13,053 15,055 Free cash flow (LC mn) -20,069-27,757-19,472-14,938-12,535 Interest cover (X) Net margin (%) 10.1% 4.6% 3.0% 2.9% 4.0% Sales/assets (X) Debt/equity (%) 46.0% 67.9% 84.6% 103.8% 119.3% Net debt/equity (%) 32.9% 57.0% 77.3% 93.1% 105.6% ROE (%) 10.4% 4.4% 2.7% 2.8% 4.1% Key model assumptions December Y/E FY12A FY13E FY14E FY15E FY16E Commercial coal output (Mt) Total coal sales volumes (Mt) Av erage ASP - Domestic Term Contract (RMB/ Av erage ASP - Domestic Spot Sales (RMB/t) Newcastle Thermal Coal Prices (USD/t) Qinhuangdao thermal coal prices (Rmb/t) Source: Bloomberg, Company and J.P. Morgan estimates. Valuation and price target basis Our Dec-14 price target for China Coal-H is HKD4.00/share. This equates to 0.5x PB and 17.6x PB based on our FY14 estimates. The PB of 0.5x is based on our forecast of sustainable ROE of c5%, derived from our near term forecast ROE (c3% in ) and what we believe is achievable in the longer term (7-8%). Our Dec-14 price target for China Coal-A is RMB4.30/share, based on the A share price differential to the H shares (A share premium of 35%). 2014E Sales product mix Coal 83% Source: J.P. Morgan estimates. Coke 5% Coal mining equip. 8% Others 4% Sensitivity analysis EBITDA EPS JPMe vs. consensus, change in estimates Sensitivity to FY14E FY15E FY14E FY15E EPS FY14E FY15E 5% change in QHD thermal coal price 15% 13% 50% 53% JPMe old % change in coal sales volume 17% 15% 57% 60% JPMe new % change in coal unit cost -16% -14% -53% -54% % chg 0% 0% 1ppt change in finance cost 0% 0% -20% -24% Consensus Source: J.P. Morgan estimates. Source: Bloomberg, J.P. Morgan estimates. Peer group valuation comparison table Source: Bloomberg, J.P. Morgan estimates. Closing prices as at 25 April

3 Table 1: China Coal Energy sales volume summary Key Points 1Q14 net income -67% yoy CCE s 1Q14 revenue fell 16% yoy to RMB16.9Bn, reflecting lower coal sales (-9% yoy) and weaker coal ASP (-10% yoy, vs QHD -12%). While it managed a 6% yoy fall in unit cost (against its guidance of less than 5% increase), impact from 11% hike in railway tariff and maintenance costs are more skewed towards 2Q or 2H, suggesting higher cost pressure in 2H14. Balance sheet remains under pressure with negative OCF and FCF pushing net gearing higher to 54% (48% end-2013). While management explained lingering contract talks affected AR payment, its aggressive capex plan amid depressed coal markets will likely keep FCF negative. It locked in 78% of sales volume in coal contracts in 1Q14. QoQ% YoY% Sales Volume (mt) 1Q12 2Q12 3Q12 4Q Q13 2Q13 3Q13 4Q Q14 1Q14 1Q14 Thermal coal % -5% Exports nm 8% Domestic % -5% - Contract % 38% - Spot % -62% Coking Coal % 17% Total % -4% Source: Company reports and J.P. Morgan estimates. Table 2: China Coal Energy ASP summary (under CAS) QoQ% YoY% Coal ASP 1Q12 2Q12 3Q12 4Q Q13 2Q13 3Q13 4Q Q14 1Q14 1Q14 Self-Produced Coal % -10% Thermal coal % -10% Exports nm -8% Domestic % -10% - Contract % -12% - Spot % -16% Coking Coal % -26% Self produced ASP % -10% Group ASP % -8% Source: Company reports and J.P. Morgan estimates. Table 3: China Coal Energy coal unit cost summary for self-produced coals (under CAS) QoQ% YoY% Unit cost (RMB/t) 1Q12 2Q12 3Q12 4Q Q13 2Q13 3Q13 4Q Q14 1Q14 1Q14 Costs under PRC GAAP Material costs % -13% Labour costs % 4% D&A % 7% Repair costs % 30% Others % -11% Total unit cost % -6% Source: Company reports and J.P. Morgan estimates. 3

4 Figure 1: China thermal coal prices (RMB/t) show bottoming Apr-07 Oct Apr-08 Oct-08 Source: Sxcoal, J.P. Morgan 520 Apr-09 Oct-09 QHD (5500Kc, RMB/t) 800 Apr-10 Oct-10 Apr-11 1Q14 behind its revenue/production targets but costs ahead For 1H14, CCE guided a decline in net profit for 1H14 given prolonged low coal prices. This implies 1H14 net income likely to fall short of RMB1.3Bn (1H13: RMB2.7Bn), highlighting risk to consensus estimates of RMB3.3Bn. As a refresher, CCE targets a 5% growth in operating revenue, on the back of a 5% increase in raw coal production (2013: 157Mt), and to control unit cost increase within 5%. Capex will remain elevated at RMB26.6Bn. This compares with 1% growth in coal production, 16% fall in revenue and 6% decline in coal cost in 1Q14. Capex spent was RMB5.3Bn in 1Q14. Coal markets finding a base In China, coal market has seen a poor start to 2014, with YTD Qinhuangdao (QHD) thermal coal price down 7% to RMB544/t on average (vs 2013 avg RMB588/t) and average coking coal falling 12% to RMB987/t (2013 avg RMB1,119/t). In the near term, there are signs that coal markets may be rebalancing as thermal coal inventories in power plants are back down to historical trend levels of 18 days (from recent high of 23 days) while domestic production has pulled back (3M14-3% yoy). In Australia, recent announcements from Glencore to shutter its Ravensworth mine is helpful to met coal markets while the strengthening AUD will likely put pressure on further closures. In Indonesia, the government s focus on restricting output and addressing illegal mining activity will be closely monitored. That said, JPM commodity team on April 7, 2014 revised down coking coal deck by 5% to USD130/t for 2014 and by 3% to USD143/t for 2015 (click report). Table 4: J.P Morgan s coal price deck JPM forecasts Spot E 2015E Newcastle Thermal USD/t QHD Thermal RMB/t QLD coking coal USD/t Chg -5.1% -3.4% China coking coal RMB/t 884 1,532 1,395 1,119 1,000 1,085 chg -4.7% -3.4% Oct-11 Source: J.P. Morgan commodity team estimates 855 Apr-12 1, Oct-12 Apr-13 Oct-13 Apr-14 Bohai Rim Thermal price (Rmb/t) Figure 2: China coking coal prices (RMB/t) stay weak 1,700 1,500 1,300 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Source: Sxcoal, J.P. Morgan China Coking Coal (Rmb/t) China 1/3 Coking (Rmb/t) China PCI (Rmb/t) China anthracite (Rmb/t) 4

5 Table 5: China Coal Energy 1Q 2014 Financial Results under CAS 1Q 2014 Result Summary QoQ% YoY% 1Q12 2Q12 Q312 Q Q13 2Q13 Q313 Q Q114 Q114 Q114 Revenues 22,225 23,495 19,345 22,226 87,292 20,125 20,273 19,211 22,707 82,316 16,859-26% -16% Cost of revenues -13,921-16,026-11,977-13,791-55,716-12,997-13,931-13,147-16,067-56,142-10,945 32% -16% Business taxes and surcharge , , % -1% Selling expenses -3,015-2,833-3,065-3,304-12,217-3,146-3,101-3,720-3,820-13,788-3,211 16% 2% General & Admin exp -1,108-1, ,234-4,266-1, ,164-1,273-4,420-1,068 16% 3% Net finance cost % 764% Impairment loss on assets nm nm (L)/gain on changes in fair nm nm Investment income * % -26% Operating income 3,756 3,091 2,990 3,470 13,307 2,602 1, , % -64% Non operating income % 26% Non operating expenses* nm -45% Profit before income tax 3,762 3,125 2,996 3,529 13,412 2,596 1, , % -63% Income tax , , % -59% Minority interest % -52% Profit for the period* 2,662 2,182 2,102 2,335 9,281 1,655 1, , % -67% IFRS ,043 1,922 1,738 8,842 1,853 1, , % -67% Source: Company reports and J.P. Morgan estimates. 5

6 JPM vs Consensus Our FY14/15/16 earnings forecasts are 28%, 36% and 32% below consensus, respectively, reflecting our more cautious view on CCE's cost cutting capability. Table 6: JPM forecast vs Consensus JPM Consensus JPM vs Consesus China Coal (RMB mn) 2014E 2015E 2016E 2014E 2015E 2016E 2014E 2015E 2016E Revenue 79,913 79,913 87,253 83,682 89, ,710-5% -10% -15% EBIT 5,065 5,065 6,800 5,946 6,739 8,471-15% -25% -20% NPAT 2,406 2,406 2,559 3,323 3,757 3,668-28% -36% -30% EPS % -36% -32% Source: Bloomberg, J.P. Morgan estimates Figure 3: China Coal H - 1 Yr Forward P/B Band Chart Figure 4: China Coal H - 1 Yr Forward P/E Band Chart HKD Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr x 1.6 x 1.2 x 0.8 x 0.4 x Apr-10 HKD Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr x 12 x 10 x 8 x 6 x Source: J.P. Morgan estimates, Bloomberg. Source: J.P. Morgan estimates, Bloomberg. 6

7 Investment Thesis, Valuation and Risks China Coal Energy - H (Neutral; Price Target: HK$4.00) Investment Thesis China Coal Energy (CCE) is the second largest coal miners in China behind Shenhua Shenhua with an annual coal production capacity of c120mt. It reported disappointing FY13 results, in line with an earlier profit warning. With coal markets still heavily oversupplied, CCE s heavy capex plans and negative free cash generation remains a concern. CCE trading at 0.5x P/B. Stay N rated, with PT of HK$4.00. Valuation Our Dec-14 price target for China Coal-H is HK$4.00/share. This equates to 0.5x P/B and 17.8x P/E based on our FY14 estimates. The PB of 0.5x is based on our forecast of sustainable ROE of c5%, derived from our near term forecast ROE (c3% in ) and what we believe is achievable in the longer term (7-8%). Risks to Rating and Price Target Upside risks Stronger-than-expected coal prices Lower-than-expected unit cost/capex Faster-than-expected additions in coal production Downside risks Weaker-than-expected coal prices Higher-than-expected cost pressure/capex Slower-than-expected additions in coal production 7

8 Investment Thesis, Valuation and Risks China Coal Energy - A (Neutral; Price Target: Rmb4.30) Investment Thesis China Coal Energy (CCE) is the second largest coal miners in China behind Shenhua Shenhua with an annual coal production capacity of c120mt. It reported disappointing FY13 results, in line with an earlier profit warning. With coal markets still heavily oversupplied, CCE s heavy capex plans and negative free cash generation remains a concern. CCE trading at 0.5x P/B. Stay N rated, with PT of HK$4.00. Valuation Our Dec-14 price target for China Coal-H is HK$4.00/share. This equates to 0.5x P/B and 17.8x P/E based on our FY14 estimates. The PB of 0.5x is based on our forecast of sustainable ROE of c5%, derived from our near term forecast ROE (c3% in ) and what we believe is achievable in the longer term (7-8%). Our Dec-14 price target for China Coal-A is RMB4.30/share, based on the A share price differential to the H shares (A share premium of 35%). Risks to Rating and Price Target Upside risks Stronger-than-expected coal prices Lower-than-expected unit cost/capex Faster-than-expected additions in coal production Downside risks Weaker-than-expected coal prices Higher-than-expected cost pressure/capex Slower-than-expected additions in coal production 8

9 China Coal Energy - A: Summary of Financials Income Statement Cash flow statement Rmb in millions, year end Dec FY12 FY13 FY14E FY15E FY16E Rmb in millions, year end Dec FY12 FY13 FY14E FY15E FY16E Revenues 87,292 82,316 79,913 87,253 93,415 EBIT 12,807 6,879 5,065 6,800 9,283 % change Y/Y (3.9%) (5.7%) (2.9%) 9.2% 7.1% Depr. & amortization 4,427 6,127 8,089 9,583 10,976 Gross Margin 19.8% 13.8% 11.8% 12.3% 14.4% Change in working capital (1,849) 3,355 (496) 363 (489) EBITDA 17,234 13,007 13,154 16,383 20,259 Taxes (3,214) (1,781) (974) (1,036) (1,523) % change Y/Y (8.8%) (24.5%) 1.1% 24.5% 23.7% Other (533) (6,499) (365) EBITDA margin 19.7% 15.8% 16.5% 18.8% 21.7% Cash flow from operations 10,887 6,788 9,635 13,053 15,055 EBIT 12,807 6,879 5,065 6,800 9,283 % change Y/Y (9.9%) (46.3%) (26.4%) 34.3% 36.5% Capex (31,146) (35,000) (30,000) (30,000) (30,000) EBIT Margin 14.7% 8.4% 6.3% 7.8% 9.9% Disposal/(purchase) Net Interest (254) (630) (1,191) (2,678) (3,213) Net Interest (254) (630) (1,191) (2,678) (3,213) Earnings before tax 12,789 6,401 3,894 4,143 6,090 Free cash flow (20,069) (27,757) (19,472) (14,938) (12,535) % change Y/Y (10.7%) (49.9%) (39.2%) 6.4% 47.0% Tax (3,214) (1,781) (974) (1,036) (1,523) Equity raised/(repaid) as % of EBT 25.1% 27.8% 25.0% 25.0% 25.0% Debt raised/(repaid) 17,146 23,344 18,357 22,000 20,000 Net income (reported) 8,842 3,805 2,406 2,559 3,762 Other (984) (86) (515) (548) (806) % change Y/Y (11.2%) (57.0%) (36.8%) 6.4% 47.0% Dividends paid (2,851) (2,784) (1,073) (722) (768) Shares outstanding 13,259 13,259 13,259 13,259 13,259 Beginning cash 20,907 13,223 11,233 7,636 11,420 EPS (reported) Ending cash 13,223 11,233 7,636 11,420 14,901 % change Y/Y (11.2%) (57.0%) (36.8%) 6.4% 47.0% DPS Balance sheet Ratio Analysis Rmb in millions, year end Dec FY12 FY13 FY14E FY15E FY16E Rmb in millions, year end Dec FY12 FY13 FY14E FY15E FY16E Cash and cash equivalents 13,223 11,233 7,636 11,420 14,901 Net profit margin 10.1% 4.6% 3.0% 2.9% 4.0% Accounts receivable 11,394 12,895 12,519 13,669 14,634 SG&A/Sales 5.3% 5.6% 5.6% 4.6% 4.6% Inventories 6,697 6,806 7,670 8,374 8,965 Others 18,079 16,793 12,817 13,442 13,966 Interest coverage (x) Current assets 49,393 47,728 40,642 46,904 52,466 Net debt to equity 32.9% 57.0% 77.3% 93.1% 105.6% Sales/assets LT investments 8,863 10,086 10,086 10,086 10,086 Assets/equity Net fixed assets 85, , , , ,274 Total Assets 185, , , , ,382 ROE 10.4% 4.4% 2.7% 2.8% 4.1% a ROA 5.1% 1.9% 1.1% 1.0% 1.4% Liabilities ROCE 7.8% 3.4% 2.3% 2.7% 3.3% Short-term loans 6,541 10,320 10,320 10,320 10,320 Payables 16,102 22,631 22,485 24,424 25,510 Others 11,484 10,547 10,479 11,382 11,888 Total current liabilities 34,127 43,498 43,284 46,126 47,718 Long-term debt 40,077 59,643 78, , ,000 Other liabilities 10,064 10,286 9,407 9,407 9,407 Total Liabilities 84, , , , ,124 Shareholder's equity 86,737 87,811 89,144 90,982 93,976 BVPS Source: Company reports and J.P. Morgan estimates. 9

10 JPM Q-Profile China Coal Energy Co. Ltd. Class H (CHINA / Energy) As Of: 25-Apr-2014 Quant_Strategy@jpmorgan.com Local Share Price Current: Mth Forward EPS Current: Earnings Yield (& local bond Yield) Current: 8% Implied Value Of Growth* Current: 3.31% 25% 20% 15% 10% 12Mth fwd EY China BY Proxy % 0% PE (1Yr Forward) Current: 12.1x Price/Book Value Current: 0.5x 45.0x 40.0x 35.0x 30.0x 25.0x 20.0x 15.0x 10.0x 5.0x 0.0x -5.0x 14.0x 12.0x 10.0x 8.0x 6.0x 4.0x 2.0x 0.0x -2.0x -4.0x PBV hist PBV Forward ROE (Trailing) Current: 4.36 Dividend Yield (Trailing) Current: Summary China Coal Energy Co. Ltd. Class H As Of: 25-Apr-14 CHINA SEDOL B1JNK84 Local Price: 4.25 Energy Oil, Gas & Consumable Fuels EPS: 0.28 Latest Min Max Median Average 2 S.D.+ 2 S.D. - % to Min % to Max % to Med % to Avg 12mth Forward PE 12.14x % 218% -9% 4% P/BV (Trailing) 0.52x % 2177% 214% 369% Dividend Yield (Trailing) % 183% -25% -7% ROE (Trailing) % 1047% 195% 411% Implied Value of Growth 3.3% % 1977% -331% -468% Source: Bloomberg, Reuters Global Fundamentals, IBES CONSENSUS, J.P. Morgan Calcs * Implied Value Of Growth = (1 - EY/Cost of equity) where cost of equity =Bond Yield + 5.0% (ERP) 10

11 JPM Q-Profile China Coal Energy Co. Ltd. Class A (CHINA / Energy) As Of: 25-Apr-2014 Quant_Strategy@jpmorgan.com Local Share Price Current: Mth Forward EPS Current: Earnings Yield (& local bond Yield) Current: 6% Implied Value Of Growth* Current: 30.16% 16% 12Mth fwd EY China BY Proxy 14% 12% 10% 8% 6% 4% 2% 0% PE (1Yr Forward) Current: 16.8x Price/Book Value Current: 0.6x 35.0x 10.0x PBV hist PBV Forward 30.0x 8.0x 25.0x 20.0x 15.0x 6.0x 4.0x 10.0x 2.0x 5.0x 0.0x 0.0x -2.0x ROE (Trailing) Current: 4.12 Dividend Yield (Trailing) Current: Summary China Coal Energy Co. Ltd. Class A As Of: 25-Apr-14 CHINA SEDOL B2NWDF2 Local Price: 4.14 Energy Oil, Gas & Consumable Fuels EPS: 0.25 Latest Min Max Median Average 2 S.D.+ 2 S.D. - % to Min % to Max % to Med % to Avg 12mth Forward PE 16.81x % 95% -24% -16% P/BV (Trailing) 0.63x % 1201% 185% 244% Dividend Yield (Trailing) % 3% -64% -54% ROE (Trailing) % 369% 168% 188% Implied Value of Growth 30.2% % 105% -72% -70% Source: Bloomberg, Reuters Global Fundamentals, IBES CONSENSUS, J.P. Morgan Calcs * Implied Value Of Growth = (1 - EY/Cost of equity) where cost of equity =Bond Yield + 5.0% (ERP) 11

12 Analyst Certification: The research analyst(s) denoted by an AC on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an AC on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. For all Korea-based research analysts listed on the front cover, they also certify, as per KOFIA requirements, that their analysis was made in good faith and that the views reflect their own opinion, without undue influence or intervention. Important Disclosures Company-Specific Disclosures: Important disclosures, including price charts, are available for compendium reports and all J.P. Morgan covered companies by visiting calling , or ing with your request. J.P. Morgan s Strategy, Technical, and Quantitative Research teams may screen companies not covered by J.P. Morgan. For important disclosures for these companies, please call or research.disclosure.inquiries@jpmorgan.com. China Coal Energy - H (1898.HK, 1898 HK) Price Chart Price(HK$) Dec 06 Jun 08 Dec 09 N HK$12.1 Jun 11 OW HK$11 N HK$7.5OW HK$8 N HK$4.5 OW HK$11.25 N HK$12 OW HK$9.5N HK$8 OW HK$9 N HK$4.8 N HK$15.7 N HK$5.3 Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. Break in coverage Mar 22, Oct 08, UW HK$11.5 N N HK$8.5 N HK$10 OW HK$9.5 OW HK$6 N HK$ Dec 12 Date Rating Share Price (HK$) 24-Jun-08 N Oct-08 N Oct-08 OW Nov-10 UW Dec-10 N Jan-11 N Mar-11 N Oct-11 N Oct-11 OW Jan-12 OW Mar-12 N May-12 N Aug-12 N Feb-13 OW Mar-13 OW Apr-13 OW Jun-13 OW Aug-13 N Oct-13 N Mar-14 N Price Target (HK$) 12

13 China Coal Energy - A ( SS, CH) Price Chart Price(Rmb) Jan 08 Oct 08 Jul 09 Apr 10 N Rmb10.4 Jan 11 OW Rmb10.6 N Rmb9.9OW Rmb9.35 OW Rmb7.1 N Rmb10.3 OW Rmb10.15 N Rmb11N Rmb7 OW Rmb8.65 N Rmb5 UW Rmb9.85 Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. Initiated coverage Nov 25, N Rmb10 N Rmb10.3 N Rmb8OW Rmb9.3 N Rmb5.8N Rmb4 Oct 11 Jul 12 Apr 13 Jan 14 Date Rating Share Price (Rmb) 25-Nov-10 UW Dec-10 N Jan-11 N Oct-11 N Oct-11 OW Jan-12 OW Mar-12 N Apr-12 N May-12 N Aug-12 N Nov-12 N Feb-13 OW Mar-13 OW Apr-13 OW Jun-13 OW Aug-13 N Oct-13 N Mar-14 N Price Target (Rmb) The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire period. J.P. Morgan ratings or designations: OW = Overweight, N= Neutral, UW = Underweight, NR = Not Rated Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst s (or the analyst s team s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst s (or the analyst s team s) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst s (or the analyst s team s) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, if applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy reasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not a recommendation or a rating. In our Asia (ex-australia) and U.K. small- and mid-cap equity research, each stock s expected total return is compared to the expected total return of a benchmark country market index, not to those analysts coverage universe. If it does not appear in the Important Disclosures section of this report, the certifying analyst s coverage universe can be found on J.P. Morgan s research website, Coverage Universe: Kang, Daniel: Adaro Energy (ADRO.JK), Aluminum Corporation of China - A ( SS), Aluminum Corporation of China - H (2600.HK), Angang Steel - A ( SZ), Angang Steel - H (0347.HK), Anhui Conch - A ( SS), Anhui Conch - H (0914.HK), Banpu Public (BANP.BK), Baoshan Iron & Steel - A ( SS), China Coal Energy - A ( SS), China Coal Energy - H (1898.HK), China Hongqiao Group (1378.HK), China National Building Material (3323.HK), China Nonferrous Mining Corporation Ltd (1258.HK), China Shenhua Energy - A ( SS), China Shenhua Energy - H (1088.HK), China Steel Corp (2002.TW), Chinalco Mining Corporation (3668.HK), Hyundai Steel Company ( KS), Indika Energy (INDY.JK), Jiangxi Copper - A ( SS), Jiangxi Copper - H (0358.HK), Maanshan Iron & Steel - A ( SS), Maanshan Iron & Steel - H (0323.HK), Mongolian Mining Corporation (0975.HK), POSCO ( KS), PT Aneka Tambang Tbk (ANTM.JK), PT Indo Tambangraya Megah (ITMG.JK), Taiwan Cement (1101.TW), Tambang Batubara Bukit Asam (PTBA.JK), Vale Indonesia (INCO.JK), Yanzhou Coal Mining - A ( SS), Yanzhou Coal Mining - H (1171.HK) 13

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