China Coal sector. Signs of recovery - upgrade Yanzhou to N

Transcription

1 China Coal sector Signs of recovery - upgrade Yanzhou to N We move to a neutral sector stance from take profits as coal market fundamentals are now showing early signs of recovery. Following a brutal domestic price war, which saw thermal prices fall nearly 15%, producers have now started to hike prices. Less competitive imports and reduced producer inventories are helping the recovery, but we maintain our view of a muted coal price rebound given significant idled capacity and policy moves to curb coal demand. With much of the downside already priced in, we upgrade Yanzhou Coal to N (from UW), keep China Coal Energy (CCE) at N and maintain Shenhua at OW, our preferred sector exposure. Price war over, recovery begins. The domestic thermal coal price war that erupted in late June, causing a collapse of nearly 15% in prices, is now over. Triggered by the leading miners in an attempt to reclaim market share, the strategy successfully squeezed out high cost domestic producers and imports. Prices have stabilized and are now pushing higher as heavy producer destocking has rebalanced domestic markets. In the near term, we think coal prices are well supported by maintenance work at the key Daqin rail line, winter restocking and high-cost imports. Assessing the damage, lower coal price outlook. Thermal coal prices retested the lows of Rmb520/t but have since recovered to Rmb535/t. This is lower than our prior expectation and we lower 2013E and 2014E thermal price forecasts by 2% and 10% respectively (4Q13E Rmb540/t, 2014E Rmb560/t, -3% yoy). As a result, we trim Shenhua and CCE earnings in 2013E by 4% and 25% in 2014E. For Yanzhou, given management s high conviction on its cost cutting strategy and 3Q13E profit guidance, we raise forecasts meaningfully. Catalysts 3Q results, annual contract negotiations, coal demand curbs. 3Q13 results are due by the end of October where we expect lower results from CCE and Shenhua given lower coal prices. Yanzhou should be an exception with guidance for 3Q profits of Rmb900m, being a reversal from last year s loss. Near term catalysts/concerns include:- a) reduced import threat, b) new annual contract arrangements, c) removal of export tax, introduction of resource tax, d) coal demand curbs. Move to a neutral sector stance. With the worst now likely behind us, we upgrade Yanzhou Coal to N and remove it from the Analyst Focus List, keep Shenhua OW and CCE at N. 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 Figure 1: Coal equities vs. coal prices Source: Bloomberg, J.P. Morgan estimates Table 1 - JPM vs Consensus 2014 EPS (RMB) JPM Street JPM vs Street Shenhua % China Coal % Yanzhou Coal % Source: Bloomberg, J.P. Morgan estimates Table 2 - Results dates, JPM 3Q13F Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 QHD price LHS JPM China Coal Index JPM 3Q13F NPAT Date Shenhua Rmb8.9Bn, -26% yoy 28 Oct China Coal Rmb550m, -74% yoy 25 Oct Yanzhou Coal Rmb900m, NA 28 Oct Source: Bloomberg, J.P. Morgan estimates Equity Ratings and Price Targets Mkt Cap Price Rating Price Target Company Ticker ($ mn) CCY Price Cur Prev Cur Prev China Shenhua Energy - H 1088 HK 60, HKD OW n/c China Shenhua Energy - A CH 54, CNY OW n/c China Coal Energy - H 1898 HK 8, HKD 4.70 N n/c China Coal Energy - A CH 11, CNY 5.44 N n/c Yanzhou Coal Mining - H 1171 HK 4, HKD 7.46 N UW Yanzhou Coal Mining - A CH 8, CNY N UW Source: Company data, Bloomberg, J.P. Morgan estimates. n/c = no change. All prices as of 14 Oct 13 except for 1088 HK [11 Oct 13] 1898 HK [11 Oct 13] 1171 HK [11 Oct 13]. See page 34 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 Table of Contents Prices bottom at lower than expected floor...3 Lowering price deck...4 Consensus downgrades likely...4 Coal markets rebalanced...5 Catalysts and concerns...6 Catalyst (1): Rising dry bulk rates reducing import threat...6 Catalyst (2): New contract pricing policy may help steady spot markets...7 Catalyst (3): Removal of coal export tax...7 Catalyst (4): Industry M&A no signs yet but potential catalyst...9 Concern (1): Coal resource tax Shanxi may pilot new tax policy...10 Concern (2): Coal consumption faces tighter controls...10 China Shenhua Energy - H...15 China Coal Energy - H...18 Yanzhou Coal Mining - H...21 China Shenhua Energy - A...24 China Coal Energy - A...24 Yanzhou Coal Mining - A

3 Figure 2: China thermal coal prices have fallen to 2008 trough Oct-06 Apr-07 Oct-07 Apr-08 Source: Sxcoal, J.P. Morgan Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Figure 4: China coastal thermal cash cost curve (FOB, 5500Kcal) QHD (5500Kc, RMB/t) 800 Prices bottom at lower than expected floor Thermal coal prices have fallen to a trough not seen since , leaving almost 30% of the domestic industry players in net loss and 20% of global seaborne supplies in cash loss, by our estimates. Still, in China, irrational production in an attempt to reduce unit cost and generate cashflow has led to coal prices in free fall. Apr Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Bohai Rim Thermal price (Rmb/t) Figure 3: Global benchmark coal prices have returned to 2009 levels Oct-05 Apr-06 Oct-06 Apr-07 Source: Sxcoal, Bloomberg, J.P. Morgan A price war in China since late June caused a collapse of nearly 15% in prices. This was triggered by the leading miners, Shenhua and China Coal Energy, in an attempt to reclaim market share from high cost domestic marginal producers and imports. This strategy, compounded by higher overseas freight rate, makes imports no longer competitive into China. We estimate landed prices from Newcastle are arriving in China at USD105/t or a premium of USD10/t over the domestic equivalent. While coal imports are expected to slow into year-end, domestic coal markets are gaining cost support from higher-priced imports, even though the domestic cost curve is flattening given cuts to local tax fees. A fight between domestic high-cost mines and imports will likely keep coal prices in the range of Rmb /t. The low end is supported by the marginal cost of domestic seaborne supplies (on FOB basis), while the high end is capped by the high-cost imports (on CFR basis). Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Figure 5: Global seaborne thermal coal cost curve (CFR, 5500Kcal) Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 QHD (5500Kc, RMB/t) Richards Bay (6000Kc, USD/t) - RHS Newcastle (6600Kc, USD/t) - RHS US West Coast Colombia Vietnam South Africa Canada Russia Oct-12 Australia Apr-13 Oct-13 US East Coast Rmb/t, FOB China seaborne thermal coal trade volume (Mt) Source: Sxcoal, J.P. Morgan estimates Rmb/t, CFR 400 Indonesia Seaborne thermalcoal trade volume (Mt) Source: AME, Sxcoal, McCloskey, J.P. Morgan estimates 3

4 Table 3: JPM coal price forecast revision summary Lowering our price deck Assessing our coal price deck, we cut 2H13 coal prices assumptions by 4% to Rmb545/t (was Rmb570/t) as we mark to mark 3Q spot prices. Our new coal price forecasts for 2014 are set at Rmb560/t (previous Rmb620/t) and Rmb575/t (previous Rmb640/t) for Changes Table Spot 1Q13A 2Q13A 3Q13E 4Q13E 2013E 2014E 2015E QHD Thermal New (RMB/t) Old % Chg -2% -7% -2% -10% -10% % yoy -17% -3% +3% Source: J.P. Morgan estimates, priced as at 14 Oct 2013 Table 4: JPM's net profit change table (RMBm) Consensus downgrades likely We cut 2014E earnings for Shenhua and CCE by an average of 25%, reflecting our coal price revisions. Our revised forecasts are 2% (or 24% ex-yzc) below consensus. We see greatest downside risk to CCE earnings and highest upside risk for Yanzhou, while Shenhua is most resilient to coal price fluctuation. Shenhua 2013E 2014E 2015E CCE 2013E 2014E 2015E Yanzhou 2013E 2014E 2015E New 42,758 40,201 43,140 New 4,318 3,453 4,099 New 1,892 2,599 3,484 Old 44,475 46,222 49,943 Old 4,494 5,537 6,459 Old (231) 501 1,328 % Chg -4% -13% -14% %Chg -4% -38% -37% %Chg -919% 419% 162% Source: J.P. Morgan estimates Table 5: JPM estimates vs consensus JPM Estimates Consensus JPM vs Consensus Shenhua (RMB mn) 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E Revenue 235, , , , , ,162-6% -10% -11% EBIT 64,604 62,626 66,869 66,109 65,465 70,233-2% -4% -5% NPAT 42,758 40,201 43,140 44,646 44,469 46,768-4% -10% -8% EPS % -10% -9% China Coal (RMB mn) 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E Revenue 74,038 75,125 81,605 82,382 88,672 98,816-10% -15% -17% EBIT 6,833 6,338 8,120 8,990 9,268 10,235-24% -32% -21% NPAT 4,318 3,453 4,099 5,589 5,583 6,553-23% -38% -37% EPS % -37% -36% Yanzhou (RMB mn) 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E Revenue 46,790 53,609 55,834 49,363 52,245 56,817-5% 3% -2% EBIT -1,315 5,174 6, ,379 4, % 53% 52% NPAT 1,892 2,599 3, ,662 2, % 56% 54% EPS % 52% 56% Source: Bloomberg, J.P. Morgan estimates 4

5 Coal markets rebalanced After a period of destocking from miners that has rebalanced domestic markets. We estimate the market inventories - comprising coal stockpiles in coal mines, power plants, and ports - fell to 270mt in August, against the peak of 380mt in June Market stock-day has also improved to 26 days, below the trend level of 27.7 days. Falling inventories should support some price stability, as evident in the second chart below, which underscore a fairly perfect relationship between monthly movement in QHD coal price and market inventory-day (in reverse order). We note that coal prices historically responded fairly positively, should the market stock-day fall below the trend level of 27.7 days, and vice versa. Figure 6: China's coal market inventories (coal mines, ports, and power plants) fell to 26 days in August, below trend level (27.7 days) Source: Sxcoal, Bloomberg, J.P. Morgan 20.5 Figure 7: Movement in QHD coal price has historically correlated with the market stock-day (in reserve order) fairly strongly 40% 30% 20% 10% 0% -10% -20% -30% -40% Feb-08 Feb-08 May Aug-08 Nov-08 Feb-09 May-09 Aug-09 Nov-09 Feb-10 May-10 Aug Nov-10 Feb-11 Historical avg: CN Social Inventory, mt (LHS) Stock day, day (RHS) Avg stock day 33.1 QHDcoal price downturn May-08 Aug-08 Nov-08 Feb-09 May-09 Aug Nov-09 Feb-10 May-10 Aug Nov-10 Feb-11 May-11 May-11 Aug Aug-11 Nov-11 Nov-11 Feb-12 May-12 Aug-12 Nov Feb May-13 QHDcoal price upturn Aug QHD coal px chg (LHS) Mkt stock day in reverse order (RHS) trend level: 27.7 days (RHS) Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug Source: CCTD, Sxcoal, CEIC, J.P. Morgan 5

6 Catalysts and concerns Near term catalysts include:- a) reduced import threat (given high freight costs), b) new annual contract arrangements, c) removal of export tax, d) industry consolidation/capacity shuts. Key concerns are a) introduction of resource tax, and b) coal demand curbs. We don t expect any rapid bounce back in prices due to the well supplied market. Catalyst (1): Rising dry bulk rates reducing import threat Global seaborne thermal coal trades have benefitted from a collapse in dry bulk markets. Since late 2008, the price spread (shipping cost included) for coals between Australia and China on CFR basis has significantly reduced from c50% to an average 6%, which in part helped boost China s monthly coal imports from 3-4Mt to 20Mt or so during the same period. While some may argue that the coal shipping cost from Australia to China was cusd20/t between 2005 and early 2007, shipping costs did account for a big part of the price disparity given Australia and China coal prices were USD50/t or so on a FOB basis. Figure 8: Price spread between Australia and China coals has narrowed sharply since BDI collapsed in mid % 100% 80% 60% 40% 20% 0% -20% -40% price spread: 53% price spread: 6% Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Aus-China coal price spread (shipping inlcuded) Aus-China coal price spread (no shipping cost) Source: Bloomberg, J.P. Morgan Figure 9: China s monthly coal imports jump from 3-4mt in late 2008 to 20-22mt of late USD/t Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Mt China coal import (Mt), RHS Capsize rate from NEWC to Japan/China (USD/t) Source: Bloomberg, J.P. Morgan 6

7 We estimate imports account for 7% of China's total supplies in 9M13. With BDI bouncing from 698 in Jan 2013 to 1985 of late, dry bulk rates for seaborne coal shipment have gone up by almost 60-70% this year from USD10/t in early this year to USD17/t for coal delivery from Australia to China. While China import data from January to August shows it will be another record year for thermal seaborne imports (8M18: 174Mt, +12% yoy), imported coals are getting difficult to price into China in recent months as a result of depressed domestic market and higher global shipping rates. We note that coal price premium for Australia over China has widened to 11% (against historical average: 6%) while the discount for Indonesian coal has narrowed to 8% (against historical average: 14%). Figure 10: Australia to China Price Premium (Discount) Figure 11: Indonesia to China Price Premium (Discount) 30% 20% 10% 0% -10% -20% 8,000 6,000 4,000 2,000-0% -5% -10% -15% -20% -25% -30% 10,000 8,000 6,000 4,000 2,000 - 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 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 Aus Thermal Coal Imports to China (kt) Aus-China Prem/(Disc) % Source: CEIC, Bloomberg, Sxcoal, J.P. Morgan Indo Thermal Coal Imports to China (kt) Indo-China Prem/(Disc) % Source: CEIC, Bloomberg, Sxcoal, J.P. Morgan Higher freight rates (and thus higher delivered coal prices) will likely result in lower demand for coal imports into China where there is strong competition with domestic coal supply. Our regional transportation analyst (Corrine Png) expects freight rates to remain strong going into the peak season in 4Q13, but will likely pull back at yearend or early next year given the holiday season and that new vessels are delivered. In longer term, she holds onto a positive contrarian view and expects average freight rates in 2014 to surpass 2013 levels. Corrine believes this year marks the cycle s bottom and the sector s recovery will be earlier than expected in 2014 as the vessel order book is overstated; scrapping/financing challenges mitigate oversupply. Catalyst (2): New contract pricing policy may help steady spot markets In China, a cancellation of key coal contracts (annual pricing) had posted unexpected challenges to spot markets given that under the new contract pricing arrangement, prices are reset on a weekly or monthly basis at a discount of Rmb10/t to the Bohai spot index. CCE acknowledged in its 1H13 results briefing that this pricing strategy created a vicious spiral of falling coal prices in an oversupplied market. CCE believes that the coal industry will come up with a new pricing method next year that should be acceptable to IPPs and miners. We believe big miners will likely push for quarterly or annual contracts to avoid price volatility and eliminate the Rmb10/t price discount, which should help steady spot coal market. Catalyst (3): Removal of coal export tax According to 21 st Century Business Herald (dated 11 Oct 2013), China is likely to ease the coal export barrier next year. The relevant government bodies are reportedly 7

8 planning to remove an export tax (currently 10% on both thermal and coking coals), but will keep a quota system in place, which has been underutilized in recent years (see table below) due to uncompetitive export pricing. Based on QHD spot price of Rmb580/t (or USD94.8/t) for 6000Kcal (NAR) and 10% export tax, we estimate the delivered prices from China are arriving in Japan at USD110/t or a premium of 15% (USD14/t) over the Australia equivalent (USD96/t). The price gap narrows to 5% (USD5/t), should a 10% export tax be removed. We see the two major benefits as a) lower trade barriers would help facilitate trade arbitrages, and thus narrow the price gap between China and regional coals, and b) higher exports can ease oversupplied coal market in China. Table 6: Impact of removal of 10% coal export tax on landed price from China arriving in Japan As-Is: 10% export tax on thermal coal Removal of 10% export tax on thermal coal From China to Japan From China to Japan QHD spot price (6000Kc, NAR, VAT-incl) (RMB/t) 580 QHD spot price (6000Kc, NAR, VAT-incl) (RMB/t) 580 Export tax 10% (RMB/t) 58 Export tax 0% (RMB/t) - Exchange rate (RMB:USD) 6.12 Exchange rate (RMB:USD) 6.12 Coastal Freight (QHD-Japan) (USD/t) 6 Coastal Freight (QHD-Japan) (USD/t) 6 Landed prices in Japan (USD/t) 110 Landed prices in Japan (USD/t) 100 From Australia to Japan From Australia to Japan Newcastle spot price (6000Kc NAR) (USD/t) 79 Newcastle spot price (6000Kc NAR) (USD/t) 79 Coastal Freight (Aus-Japan) (USD/t) 17 Coastal Freight (Aus-Japan) (USD/t) 17 Landed prices in Japan (USD/t) 96 Landed prices in Japan (USD/t) 96 China to Australia Premium/(Discount) (USD/t) 14 China to Australia Premium/(Discount) (USD/t) 5 China to Australia Premium/(Discount) (%) 15% China to Australia Premium/(Discount) (%) 5% Source: dsfa Table 7: China's export/import tax policy on coal and coke Effective date Thermal Coal Coking coal Coke Pre export tax rebate 13 export tax rebate 15% export tax rebate 6% import tax 3% import tax 5% import tax Jan-04 11% export tax rebate 5% export tax rebate 5% export tax rebate 6% import tax 3% import tax 5% import tax May-04 11% export tax rebate 0% export tax rebate 0% export tax rebate 6% import tax 3% import tax 5% import tax Jan-05 11% export tax rebate 0% export tax rebate 5% import tax 6% import tax 0% import tax Apr-05 11% export tax rebate - 5% import tax 3% import tax - May-05 8% export tax rebate - 5% import tax 3% import tax - Sep-06 0% export tax rebate - 5% import tax 3% import tax - Nov-06 1% import tax 5% export tax 5% export tax 0% import tax Jun-07 0% import tax 5% export tax 15% export tax Jan-08-5% export tax 25% export tax Aug-08 10% export tax 10% export tax 40% export tax Jan-14 10% export tax 10% export tax 0% export tax Source: Sxcoal, Ministry of Commerce, Ministry of Finance, NDRC, J.P. Morgan 8

9 Table 8: China s coal/coke exports vs actual export volume Coal (incl coking) Coke Quota (mt) Export Vol (mt) Quota (mt) Export Vol (mt) (8M13) No quota system 2.4 (8M13) Source: Sxcoal, Bloomberg, J.P. Morgan Catalyst (4): Industry M&A no signs yet but potential catalyst Defying conventional thinking, supply discipline in China has been disappointing, even though we estimate almost 30% of the domestic industry players are in net loss and 15-20% in cash loss. Irrational production in an attempt to reduce unit cost and generate cashflow has exacerbated the oversupplied situation in China. We note that Inner Mongolia and Shanxi coal output in August recovered by 20% and 10%, respectively, from July. While Shanxi cut August output by 2% mom, it has reportedly raised production by 23% mom during Sept How long irrational production (below cash costs) can last in our opinion is now a function of balance sheet strength and local government support, given the potential labor market dislocations. At this stage, we believe industry M&A has been limited given unrealistic valuations from vendors but any progress could only help restore market balances. Table 9: China's irrational coal production (below cash costs) has led to coal prices in free fall Aug-13 Jul-13 Jun-13 May-13 Apr-13 Mar-13 Feb-13 Jan-13 8M13 8M12 YOY CN annualized coal output Mt 3,532 3,532 3,589 3,473 3,589 3,415 3,454 3,650 3,529 3,778-7% Inner Mongolia Mt 1, ,169 1, ,018-9% Shanxi Mt , % Shaanxi Mt % Others Mt 1,004 1,254 1,153 1, ,714 1,510 1,204 1,423-15% Top 3's output share % 72% 64% 68% 69% 73% 72% 50% 59% 66% 62% 4pps % of Inner Mongolia % 31% 25% 23% 24% 33% 34% 19% 23% 26% 27% -1pps % of Shanxi % 26% 24% 30% 28% 27% 28% 24% 23% 26% 24% 2pps % of Shaanxi % 15% 15% 16% 16% 13% 11% 8% 13% 13% 11% 2pps YoY Change China % -7% -12% -15% -14% -8% -8% -4% 24% -6% nm Inner Mongolia % 15% -9% -24% -24% 0% 6% -32% 0% -12% nm nm Shanxi % 13% -1% 1% 3% 2% 0% -8% 8% 1% nm nm Shaanxi % 35% 13% 10% 11% 3% -8% -29% 44% 5% nm nm Others % -39% -26% -27% -27% -26% -26% 24% 49% -15% nm nm Source: Sxcoal, J.P. Morgan 9

10 Concern (1): Coal resource tax Shanxi may pilot new tax policy Coal resource tax reform may occur by the end of the year with Shanxi likely to pilot the resource tax changes. There are currently 2 proposals being considered, according to McCloskey. The first would impose a levy of % based on exmine prices, while the sustainable development tax abolished. The second plan would charge a rate of % but with the sustainable development tax remaining in place. At present, resource tax is Rmb3.2/t for unwashed thermal coal and Rmb8-20/t for coking coal in China. Shanxi launched its own sustainable development tax policy in 2007, setting at Rmb14/t for steam coal, Rmb18/t for anthracite and Rmb20/t for coking coal. In 2011, the rates were raised to Rmb18/t for steam coal, and Rmb23/t for both anthracite and coking coal. With ex-mine prices of major producers in Shanxi currently around RMB /t for steam coal, the tax would charge around RMB /t, if the sustainable development tax is cancelled. For coking coals at around RMB600/t, the figure would rise to RMB /t, versus RMB31/t based on the current rate, which contains RMB23/t sustainable fund and RMB8/t resource tax. Concern (2): Coal consumption faces tighter controls With pollution measures likely to be reiterated at the upcoming November Plenary session, Chinese authorities will likely introduce tighter controls over coal consumption. On September 12, 2013, the State Council revealed a coal consumption cap where coal consumption is targeted to fall to less than 65% of the country s total energy consumption by 2017, from approximately 66.4% in Three major industrial regions - Beijing-Tianjin-Hebei, Yangtze River Delta and Pearl River Delta - are being targeted as key areas for coal consumption cuts. These regions cover approximately 8% of China s total land mass, but account for more than one third of the country s coal consumption, according to estimates. In the Beijing-Tianjin-Hebei region, coal consumption is expected to fall more than 63mt/yr, with Hebei to cut its coal burn by 40mt/yr, from around 300mt/yr currently. According to McCloskey, to achieve these targets, the plan requires:- the construction of more desulphurisation, denitration and dust handling facilities in key sectors. Desulphurisation facilities should be installed in all coal-fired power plants, steel mills, oil refining plants, and non-ferrous metal smelting plants as well as boilers above 20 tonnes/hour of steam output. Construction of pollution treatment facilities in power plants and boilers should be concluded by the end of 2015 in the three key regions. New coal-fired power plants will be banned in these regions, except for combined heat and power projects. Rapid development of cleaner energies, particularly natural gas. At least 50bn m3/yr of natural gas pipelines will be built in the three regions before Plans are also outlined to speed up coal-to-gas projects. 10

11 Use of non-fossil energy will be lifted. By 2017, non-fossil energy in China s total energy consumption will rise to 13%, from 9.1% in The capacity of nuclear power units will hit 50GW (versus current level of 14.74GW). The plan also calls for an increase in coal efficiency, with the raw coal washing rate to exceed 70% by 2017 from 55.4% in Figure 12: China s IPP thermal-coal inventory days rebounded to 22 day, against trend level 17.5 days Oct Source: Sxcoal, J.P. Morgan Figure 14: China s monthly coal production (annualized) -Current utilization rate at 78-84% based on bt capacity 4,300 3,800 3,300 2,800 2,300 1,800 1, Jan-11 Apr-11 Source: NBS, J.P. Morgan Jul-11 Oct Historical avg (day): 17.5 Jan-12 Inventory at key IPPs (mt) Stock days (RHS) Apr-12 Jul-12 Oct-12 Jan LT avg (RHS) 4,107 4,139 Apr-13 Jul-13 4, Oct-13 3,532 Aug-04 Feb-05 Aug-05 Feb-06 Aug-06 Feb-07 Aug-07 Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 Aug Figure 13: China s coal imports are expected to fall due to uncompetitive pricing 30,000 25,000 20,000 15,000 10,000 5,000 Source: Bloomberg, J.P. Morgan Figure 15: Thermal power utilization seasonally strengthens in summer and winter Source: NBS, J.P. Morgan 200% 150% 100% 50% 0% -50% % May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Thermal Coking Anthracite yoy% (RHS) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

12 China Coal Supply/Demand model Coal (mt) E 2014E 2015E CAGR E Demand Thermal coal 1,540 1,800 2,008 2,460 2,788 3,105 3,166 3,320 3,455 3, % % yoy 7.6% 10.8% 3.1% 12.5% 11.4% 2.0% 4.9% 4.1% 4.0% Coking coal % % yoy 12.8% -4.6% 17.4% 11.7% 9.7% 0.0% 8.3% 5.3% 3.1% Others % % yoy -24.4% 1.8% -28.5% 9.7% 3.9% 24.1% -8.1% -4.8% -5.1% Total consumption 2,300 2,518 2,711 3,153 3,559 3,938 4,056 4,235 4,392 4, % % yoy 9.5% 7.6% 16.3% 12.9% 10.6% 3.0% 4.4% 3.7% 3.3% End use demand Power generation 1,170 1,325 1,365 1,461 1,615 1,750 1,855 1,936 2,032 2, % % yoy 13.2% 3.0% 7.0% 10.5% 8.4% 6.0% 4.4% 4.9% 4.9% % total demand 51% 53% 50% 46% 45% 44% 46% 46% 46% 47% Steel (clean coal) % % yoy 12.8% -4.6% 17.4% 11.7% 9.7% 0.0% 8.3% 5.3% 3.1% % total demand 17% 17% 15% 16% 15% 15% 15% 15% 16% 16% Cement % % yoy 10.8% -22.1% 17.3% 43.0% 10.7% 5.8% 6.0% 2.0% 2.0% % total demand 16% 16% 12% 12% 15% 15% 15% 16% 15% 15% Chemical % % yoy 8.3% -30.8% 2.8% -2.9% 0.1% 2.0% 2.0% 2.0% 2.0% % total demand 5% 5% 3% 3% 3% 2% 2% 2% 2% 2% Others % % yoy -14.2% 140.1% 41.6% 4.9% 17.2% -2.6% 1.1% 1.2% 1.2% Total 2,300 2,518 2,711 3,153 3,559 3,938 4,056 4,235 4,392 4, % % yoy 9.5% 7.6% 16.3% 12.9% 10.6% 3.0% 4.4% 3.7% 3.3% Supply Supply by coal type: Thermal coal 1,492 1,736 1,943 2,320 2,609 2,891 2,910 3,150 3,320 3, % % yoy 25.9% 16.3% 11.9% 19.4% 12.5% 10.8% 0.6% 8.3% 5.4% 5.2% Coking coal % % yoy 11.9% -4.6% 10.2% 9.9% 11.6% -2.0% 6.0% 5.1% 2.6% Anthracite % % yoy -0.6% 0.0% -3.0% 12.5% 10.4% -4.0% 8.3% 5.4% 5.2% Others Total 2,325 2,523 2,716 3,050 3,413 3,770 3,830 3,996 4,183 4, % % yoy 8.5% 7.6% 12.3% 11.9% 10.5% 1.6% 4.3% 4.7% 4.2% China Coal Trade Thermal net (exports) / imports* % Coking net (exports) / imports % Total net (exports) / imports % Apparent consumption 2,300 2,518 2,711 3,153 3,559 3,938 4,056 4,235 4,392 4, % % yoy 9.5% 7.6% 16.3% 12.9% 10.6% 3.0% 4.4% 3.7% 3.3% Note: Thermal net trade includes Anthracite trade volumes. Source: China Coal Resource, J.P. Morgan estimates 12

13 Table 10: Summary of China coal equities Company China Coal Shenhua Yanzhou Sector Ticker CH/1898 HK CH/1088 HK CH/1171 HK Share price RMB 5.45 / HKD 4.7 RMB / HKD 23.5 RMB / HKD 7.46 Rating N OW N Market Capitalization (USDm) 10,646 55,446 7,044 73,137 Reporting Currency RMB RMB RMB Financial Ratios PE (x) E E EV/EBITDA (x) E E PB (x) E E EBITDA Margin (%) % 35% 18% 31% 2013E 18% 35% 7% 30% 2014E 19% 36% 20% 32% EBIT Margin (%) % 28% 11% 24% 2013E 9% 27% -3% 22% 2014E 8% 26% 10% 22% Dividend Yield (%) % 5.2% 6.1% 5.3% 2013E 2.6% 4.5% 0.0% 3.8% 2014E 2.1% 4.3% 2.7% 3.8% Gearing (Net debt/equity %) % 5% 58% 14% 2013E 61% 7% 75% 22% 2014E 78% 8% 66% 24% ROE (%) % 20% 9% 18% 2013E 5% 16% 4% 13% 2014E 4% 14% 6% 11% Production Volume (Mt) E E EBITDA/t (USD) E E EV/t production (USD) E E Output Volume/Employee (t) ,081 3, , E 2,087 3, , E 2,241 3, ,314 Unit coal production cost (RMB/t) E E Source: Company data, Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as at. 13

14 Table 11: Global Coal Valuation Table Price Mkt Cap YTD PE (x) P/B (x) EV/EBITDA (x) Yld (%) ROE (%) Company Ticker (LC) USDm Rating Perf 13E 14E 13E 14E 13E 14E 13E 13E China H share China Shenhua 1088.HK ,300 OW -30.8% China Coal Energy 1898 HK 4.7 2,489 N -44.2% Yanzhou Coal 1171 HK ,884 N -41.8% China Qinfa Group 866 HK NC -50.4% Shougang Fushan 639 HK ,723 NC -11.6% Hidili Industry 1393 HK NC -35.8% na MMC 975 HK N -66.8% SouthGobi 1878 HK N -42.6% Winsway Coking 1733 HK NC -51.5% na na na China A share China Shenhua CH ,171 OW -34.0% China Coal Energy CH ,161 N -30.3% Yanzhou Coal CH ,163 N -41.5% Australia Yancoal Australia YAL AU NC -34.0% na na New Hope Corp Ltd NHC AU ,006 NC -9.3% Whitehaven Coal WHC AU ,734 N -49.0% na na South Asia Coal India COAL IN ,150 N -20.4% Adaro Energy ADRO IJ 990 2,889 N -37.7% Berau Coal Energy BRAU IJ OW 2.6% na Tambang Batubara PTBA IJ ,849 OW -10.3% Indika Energy INDY IJ N -43.0% na Semirara Mining SCC PM 257 2,122 N 10.1% Aneka Tambang ANTM IJ ,314 OW 18.0% Bumi Resources BUMI IJ N -17.8% Banpu PCL BANPU TB ,349 N -30.8% North America Alpha Natural ANR US ,297 N -39.7% na na na na Arch Coal Inc ACI US N -45.4% na na CONSOL Energy CNX US ,735 OW 18.9% na na Peabody Energy BTU US ,692 OW -34.6% na na Walter Energy Inc WLT US NC -58.6% na na Cloud Peak Energy CLD US N -22.9% na na na 4.1 Source: Bloomberg, Bloomberg consensus for stocks Not Covered (NC), J.P. Morgan estimates. Note: Share prices and valuations are as at. 14

15 Overweight 1088.HK,1088 HK Price: HK$23.50 Price Target: HK$26.50 Previous: HK$28.00 China Asia Metals and Mining Daniel Kang AC Bloomberg JPMA KANG <GO> J.P. Morgan Securities (Asia Pacific) Limited Price Performance HK$ Oct-12 Jan-13 Apr-13 Jul-13 Oct HK share price (HK$) HSI (rebased) YTD 1m 3m 12m Abs -33.4% -13.0% 12.2% -23.8% Rel -33.0% -14.2% 3.9% -34.4% Source: Bloomberg Company Data Shares O/S (mn) 19,890 Market Cap (Rmb mn) 368,814 Market Cap ($ mn) 60,279 Price (HK$) Date Of Price 11 Oct 13 Free Float(%) - 3M - Avg daily volume (mn) M - Avg daily value (HK$ mn) 3M - Avg daily value ($ mn) 61.4 HSI 2, Exchange Rate 7.75 Fiscal Year End Dec China Shenhua Energy - H Best in class - Stay OW Shenhua s 1H13 results highlights the strength of its integrated, low-cost operations. Power was the star of the show providing some shelter from the storm in coal markets. While Shenhua is not immune to falling coal prices and a potential cut to power tariff reduces its natural hedge benefits, growth in non-coal businesses are forecast to drive earnings growth in the medium term. Shenhua remains our preferred exposure given its high quality, low cost assets - Stay OW. 3Q13 results preview Shenhua s 3Q13 results are due on 28 Oct We expect 3Q net profit to be Rmb8.9b (-26% yoy or -32% qoq), leaving 9M13 net profit at Rmb33.8b (-13% yoy). This reflects a 9% decline in 3Q QHD coal prices to Rmb549/t from Rmb606/t in 2Q. Earnings outlook Following our coal prices revisions, we cut FY13/14 earnings by 4% and 13%, expecting a 28% hoh decline in 2H13 earnings, and 6% yoy fall in 2014 earnings. Power, railway and coal chemical businesses are expected to be new growth drivers. Key catalysts Coal price bottoming (Positive). QHD coal prices are now stabilizing after a period of destocking from miners that has rebalanced domestic markets. We expect winter restocking and slowing imports to help steady spot market. Improved assets mix (Positive). New growth drivers will come from power, railway and coal chemical business. Baotou's CTO project injection is due in 2H. Attractive valuation (Positive). Our sum-of-the part valuation suggests replacement value at HKD22.3/share, providing valuation support. Power tariff cut to reduce natural hedge benefit (Negative). We modeled 3% cut in power tariff for 2014E; Less than expected tariff cut is considered positive. Valuation Rolling over to 2014 forecasts, our Dec-14 price targets are revised to HKD26.5/share (was HKD28.0/share) for H-share and RMB18.2/share (was RMB20.5/share). This implies a 1.3x P/B on H-share FY14 forecasts. China Shenhua Energy - H (Reuters: 1088.HK, Bloomberg: 1088 HK) Rmb in mn, year-end Dec FY11A FY12A FY13E FY14E FY15E Revenue (Rmb mn) 209, , , , ,918 Net Profit (Rmb mn) 45,826 48,858 42,758 40,201 43,140 EPS (Rmb) DPS (Rmb) Revenue growth (%) 32.7% 19.6% (5.9%) 0.7% 4.5% EPS growth (%) 18.0% 6.6% (12.5%) (6.0%) 7.3% ROCE 19.3% 19.0% 15.4% 13.8% 13.8% ROE 21.2% 20.2% 15.8% 13.6% 13.5% P/E (x) P/BV (x) EV/EBITDA (x) Dividend Yield 4.9% 5.2% 4.5% 4.3% 4.6% Source: Company data, Bloomberg, J.P. Morgan estimates. 15

16 Company Description Sensitivity metrics 2014E NP 2014E NP Impact (RMBm) Impact (%) Shenhua is China s leading largest 5% change in QHD thermal coal prices 3, % integrated coal-based energy company 5% change in coal sales volumes 1, % with production of 304Mt of commercial 1% change in power tariffs % coal in The company has a vertically integrated mine-rail-port network Source: J.P. Morgan estimates to sell coal products to its primarily domestic customer base. The company also has a power generation business. Its primary shareholder is its state-owned parent company Shenhua Group. The company has listings in Hong Kong and Shanghai. Key company assumptions December Y/E Commercial coal output (Mt) Total coal sales v olumes (Mt) Pow er output (Mn GWh) Average ASP - Domestic Spot Sales (RMB/t) FY11A , FY12A , FY13E , FY14E , FY15E , E Sales product mix Coal 63% Railway 10% Port 1% Other 0% Power 25% Shipping 1% Newcastle Thermal Coal Prices (USD/t) Qinhuangdao thermal coal prices (Rmb/t) Source: Company, J.P. Morgan estimates Price target and valuation analysis Our Dec-14 price target for Shenhua-H of HKD26.5/share (from HKD28.0/share), is based on a blended average of: 1) PB-ROE valuation of HKD20.5, 2) 7.1x EV/EBITDA, 3) 11.9x historical 4-year PE average and 4) DCF-based NPV of HKD35.9. Our Dec-14 price target for Shenhua-A is RMB18.2/share (prev. RMB20.5), based on A/H share price discount of 12.2%, from prev 14.5%. Risks to our rating includes weaker-than-expected coal prices and power tariffs, higher -than-expected cost pressure, slower-than-expected addition in coal production and power generation. Source: J.P. Morgan estimates Table 12: China Shenhua Energy earnings change table (RMBm) Old New Change Profit and loss Dec-13e Dec-14e Dec-15e Dec-13e Dec-14e Dec-15e Dec-13e Dec-14e Dec-15e s 239, , , , , , % -7.8% -8.1% COGS (161,418) (172,957) (179,537) (160,009) (162,854) (168,777) -0.9% -5.8% -6.0% EBITDA 86,152 93, ,476 83,625 84,792 92, % -9.5% -9.7% EBIT 67,130 71,477 76,776 64,604 62,626 66, % -12.4% -12.9% NPAT 44,475 46,222 49,943 42,758 40,201 43, % -13.0% -13.6% Diluted EPS % -13.0% -13.6% Source: Company reports and J.P. Morgan estimates. Figure 16: Shenhua H - 1 Yr Forward PB Band Chart Oct-09 HKD Apr-10 Oct-10 Apr-11 Oct-11 Source: J.P. Morgan estimates, Bloomberg. Apr-12 Oct-12 Apr-13 Oct-13 5 x 4 x 3 x 2 x 1 x Figure 17: Shenhua H - 1 Yr Forward PE Band Chart 90 HKD Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Source: J.P. Morgan estimates, Bloomberg. Apr-12 Oct-12 Apr-13 Oct x 20 x 15 x 10 x 5 x 16

17 China Shenhua Energy - H: Summary of Financials Income Statement Cash flow statement Rmb in millions, year end Dec FY11 FY12 FY13E FY14E FY15E Rmb in millions, year end Dec FY11 FY12 FY13E FY14E FY15E Revenues 209, , , , ,918 EBIT 68,706 69,604 64,604 62,626 66,869 % change Y/Y 32.7% 19.6% (5.9%) 0.7% 4.5% Depr. & amortization 14,856 16,797 19,022 22,166 25,700 Gross Margin 38.5% 33.0% 32.1% 31.3% 31.9% Change in working capital 7,648 (4,224) 16,984 (17,013) 727 EBITDA 83,562 86,401 83,625 84,792 92,569 Taxes % change Y/Y 17.9% 3.4% (3.2%) 1.4% 9.2% Other 2,619 7, (19) 1 EBITDA margin 39.9% 34.5% 35.5% 35.7% 37.3% Cash flow from operations 70,949 69,055 78,915 45,335 69,568 EBIT 68,706 69,604 64,604 62,626 66,869 % change Y/Y 19.4% 1.3% (7.2%) (3.1%) 6.8% Capex (45,082) (52,256) (67,450) (35,000) (30,000) EBIT Margin 32.8% 27.8% 27.4% 26.4% 27.0% Disposal/(purchase) Net Interest (2,204) (2,071) (1,694) (3,120) (3,010) Net Interest (2,204) (2,071) (1,694) (3,120) (3,010) Earnings before tax 66,829 68,011 63,352 59,935 64,317 Free cash flow 27,608 18,536 12,828 12,831 41,976 % change Y/Y 19.5% 1.8% (6.9%) (5.4%) 7.3% Tax (14,041) (10,965) (12,354) (11,987) (12,863) Equity raised/(repaid) as % of EBT 21.0% 16.1% 19.5% 20.0% 20.0% Debt raised/(repaid) (16,493) 1, Net income (reported) 45,826 48,858 42,758 40,201 43,140 Other 77 (817) % change Y/Y 18.0% 6.6% (12.5%) (6.0%) 7.3% Dividends paid (14,917) (17,901) (19,094) (16,710) (15,711) Shares outstanding 19,890 19,890 19,890 19,890 19,890 Beginning cash 77,302 61,652 51,627 43,998 37,622 EPS (reported) Ending cash 61,652 51,627 43,998 37,622 61,480 % change Y/Y 18.0% 6.6% (12.5%) (6.0%) 7.3% DPS Balance sheet Ratio Analysis Rmb in millions, year end Dec FY11 FY12 FY13E FY14E FY15E Rmb in millions, year end Dec FY11 FY12 FY13E FY14E FY15E Cash and cash equivalents 61,652 51,627 43,998 37,622 61,480 Net profit margin 21.9% 19.5% 18.2% 16.9% 17.4% Accounts receivable 13,618 20,028 21,747 18,985 19,841 SG&A/Sales 5.3% 5.2% 4.6% 4.8% 4.8% Inventories 12,939 15,171 15,905 14,728 15,264 Others 20,317 24,534 37,243 23,780 24,398 Interest coverage (x) Current assets 108, , ,894 95, ,982 Net debt to equity 0.1% 5.2% 7.1% 8.4% 1.6% Sales/assets LT investments 4,827 5,649 5,649 5,649 5,649 Assets/equity Net fixed assets 223, , , , ,085 Total Assets 406, , , , ,706 ROE 21.2% 20.2% 15.8% 13.6% 13.5% a ROA 11.8% 11.3% 8.8% 7.9% 8.3% Liabilities ROCE 19.3% 19.0% 15.4% 13.8% 13.8% Short-term loans 16,489 28,093 28,093 28,093 28,093 Payables 23,763 31,072 28,916 30,164 31,262 Others 47,497 46,392 80,695 45,030 46,671 Total current liabilities 87, , , , ,025 Long-term debt 45,443 39,624 39,624 39,624 39,624 Other liabilities 5,201 5,629 5,779 5,760 5,761 Total Liabilities 138, , , , ,411 Shareholder's equity 228, , , , ,327 BVPS Source: Company reports and J.P. Morgan estimates. 17

18 Neutral 1898.HK,1898 HK Price: HK$4.70 Price Target: HK$4.50 Previous: HK$4.80 China Asia Metals and Mining Daniel Kang AC Bloomberg JPMA KANG <GO> J.P. Morgan Securities (Asia Pacific) Limited Price Performance 9 7 HK$ 5 3 Oct-12 Jan-13 Apr-13 Jul-13 Oct HK share price (HK$) HSI (rebased) YTD 1m 3m 12m Abs -46.7% -12.0% 12.7% -35.6% Rel -46.3% -13.2% 4.4% -46.2% China Coal Energy - H In No Man s Land - Stay Neutral China Coal Energy (CCE) s 1H13 results marked its weakest half year results since listing but we expect 2H to be worse. CCE s strategic shift into coal-to-chemicals may serve as a new growth driver in the medium term, but we think hefty capex commitment will push gearing to 70-90% in the next months. We view the stock as being in a no man s land' given likely downgrades in the near term but at 0.5x FY14E PB, valuations should provide downside protection - Stay Neutral. 3Q13 results preview CCE s 3Q13 results are due on 25 Oct We expect 3Q net profit to fall sharply to Rmb550m (-74% yoy or -49% qoq), putting 9M13 net profit at Rmb3.77b (-46% yoy). This reflects a 9% fall in QHD prices to Rmb549/t in 3Q from Rmb606/t in 2Q. Earnings outlook Following our coal prices revisions, we cut FY13/14 earnings by 4% and 38%, indicating a 70% hoh decline in 2H13E earnings, and 20% yoy fall in 2014E earnings. CCE believes that its coal chemical business should be a new growth driver (yet no specific returns provided). However, we estimates a hefty capex requirement (thus negative FCF) will push gearing (ND/E) to 71% in FY13E and 91% in FY14E. Key catalysts Coal price bottoming (Positive). QHD coal prices are now stabilizing after a period of destocking from miners that has rebalanced domestic markets. We expect winter restocking and slowing imports to help steady the spot market. Deteriorating balance sheet (Negative). CCE s high capex requirement may keep FCF negative in a depressed coal market. Valuation & catalysts Rolling over to 2014 forecasts, our Dec-14 price targets are cut to HKD4.5/share (was HKD4.8/share) for H-share and RMB5.0/share (was RMB5.8/share). This implies 0.5x P/B on H-share FY14 forecasts. Company Data Shares O/S (mn) 13,259 Market Cap (Rmb mn) 49,171 Market Cap ($ mn) 8,036 Price (HK$) 4.70 Date Of Price 11 Oct 13 Free Float(%) 43.4% 3M - Avg daily volume (mn) M - Avg daily value (HK$ mn) 3M - Avg daily value ($ mn) 33.8 HSI 2, Exchange Rate 7.75 Fiscal Year End Dec China Coal Energy - H (Reuters: 1898.HK, Bloomberg: 1898 HK) Rmb in mn, year-end Dec FY11A FY12A FY13E FY14E FY15E Revenue (Rmb mn) 90,865 87,292 74,038 75,125 81,605 Net Profit (Rmb mn) 9,955 8,842 4,318 3,453 4,099 EPS (Rmb) DPS (Rmb) Revenue growth (%) 29.2% (3.9%) (15.2%) 1.5% 8.6% EPS growth (%) 33.3% (11.2%) (51.2%) (20.0%) 18.7% ROCE 10.9% 7.8% 3.6% 2.9% 3.3% ROE 12.7% 10.4% 4.9% 3.9% 4.5% P/E (x) P/BV (x) EV/EBITDA (x) Dividend Yield 5.8% 5.7% 2.6% 2.1% 2.5% Source: Company data, Bloomberg, J.P. Morgan estimates. 18

19 Company Description Sensitivity metrics 2014E NP 2014E NP Impact (RMBm) impact (%) China Coal Energy is one of the largest coal 5% change in QHD thermal coal prices 1,333 47% producers in China, with 114Mt of 5% change in coal sales volumes 187 7% commercial coal output in The Source: J.P. Morgan estimates company is primarily engaged in the production and trading of coal/coke products and the manufacturing coal mining equipment. Its primary shareholder is its state-owned parent company China National Coal Group. The company has listings in Hong Kong, and Shanghai. Key company assumptions Decem ber Y/E Commercial coal output (Mt) Total coal sales v olumes (Mt) FY11A FY12A FY13E FY14E FY15E E Sales product mix Coal 83% Source: J.P. Morgan estimates. Table 13: China Coal Energy earnings change table (RMBm) Source: Company data, J.P. Morgan estimates. Price target and valuation analysis Our Dec-14 price target for China Coal-H of HKD4.5/share (prev. HKD4.8) is based on a blended average of: 1) PB-ROE valuation of HKD2.6, 2) 6.4x EV/EBITDA, 3) 10.2x 4-year P/E average and 4) DCF-based NPV of HKD4.7. Our Dec-14 price target for China Coal-A of RMB5.0/share (prev. RMB5.8), is based on an A/H share price differential of 41.8% from 55% previously. Key risks include stronger-than-expected coal prices, lower-than-expected cost pressure/capex, faster-than-expected addition in coal production. Old New Change Profit and loss Dec-13e Dec-14e Dec-15e Dec-13e Dec-14e Dec-15e Dec-13e Dec-14e Dec-15e Revenue 77,935 89,516 95,023 74,038 75,125 81, % -16.1% -14.1% COGS (66,211) (74,412) (78,230) (63,578) (65,105) (69,895) -4.0% -12.5% -10.7% EBITDA 14,033 18,807 22,195 12,960 14,428 17, % -23.3% -20.2% EBIT 7,906 10,718 12,612 6,833 6,338 8, % -40.9% -35.6% NPAT 4,494 5,537 6,459 4,318 3,453 4, % -37.6% -36.5% Diluted EPS % -37.6% -36.5% Source: J.P. Morgan estimates. Coke 5% Coal mining equip. 8% Others 4% Av erage ASP - Domestic Term Contract (RMB/t Av erage ASP - Domestic Spot Sales (RMB/t) New castle Thermal Coal Prices (USD/t) Qinhuangdao thermal coal pric es (Rmb/t) Figure 18: China Coal Energy H - 1 Yr Forward PB Band Chart 25 HKD 2.5 x x x x x 0 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Source: J.P. Morgan estimates, Bloomberg. Figure 19: China Coal Energy H - 1 Yr Forward PE Band Chart 30 HKD x x x x 5 5 x 0 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Source: J.P. Morgan estimates, Bloomberg. 19

20 China Coal Energy - H: Summary of Financials Income Statement Cash flow statement Rmb in millions, year end Dec FY11 FY12 FY13E FY14E FY15E Rmb in millions, year end Dec FY11 FY12 FY13E FY14E FY15E Revenues 90,865 87,292 74,038 75,125 81,605 EBIT 14,219 12,807 6,833 6,338 8,120 % change Y/Y 29.2% (3.9%) (15.2%) 1.5% 8.6% Depr. & amortization 4,669 4,427 6,127 8,089 9,583 Gross Margin 20.7% 19.8% 14.1% 13.3% 14.3% Change in working capital 290 (1,838) (2,423) 264 (268) EBITDA 18,887 17,234 12,960 14,428 17,702 Taxes (3,213) (3,214) (1,573) (1,258) (1,493) % change Y/Y 29.5% (8.8%) (24.8%) 11.3% 22.7% Other (216) (544) EBITDA margin 20.8% 19.7% 17.5% 19.2% 21.7% Cash flow from operations 14,698 10,887 8,586 12,127 13,795 EBIT 14,219 12,807 6,833 6,338 8,120 % change Y/Y 28.5% (9.9%) (46.6%) (7.2%) 28.1% Capex (19,868) (31,146) (35,000) (30,000) (30,000) EBIT Margin 15.6% 14.7% 9.2% 8.4% 9.9% Disposal/(purchase) Net Interest (198) (254) (822) (1,588) (2,428) Net Interest (198) (254) (822) (1,588) (2,428) Earnings before tax 14,315 12,789 6,293 5,032 5,974 Free cash flow (5,021) (20,069) (25,798) (16,682) (14,384) % change Y/Y 30.2% (10.7%) (50.8%) (20.0%) 18.7% Tax (3,462) (3,214) (1,573) (1,258) (1,493) Equity raised/(repaid) as % of EBT 24.2% 25.1% 25.0% 25.0% 25.0% Debt raised/(repaid) 5,321 17,146 17,923 20,000 17,000 Net income (reported) 9,955 8,842 4,318 3,453 4,099 Other 15,195 (984) (401) (321) (381) % change Y/Y 33.3% (11.2%) (51.2%) (20.0%) 18.7% Dividends paid (2,073) (2,851) (2,784) (1,296) (1,036) Shares outstanding 13,259 13,259 13,259 13,259 13,259 Beginning cash 22,922 20,907 13,223 1,544 2,055 EPS (reported) Ending cash 20,907 13,223 1,544 2,055 1,433 % change Y/Y 33.3% (11.2%) (51.2%) (20.0%) 18.7% DPS Balance sheet Ratio Analysis Rmb in millions, year end Dec FY11 FY12 FY13E FY14E FY15E Rmb in millions, year end Dec FY11 FY12 FY13E FY14E FY15E Cash and cash equivalents 20,907 13,223 1,544 2,055 1,433 Net profit margin 11.0% 10.1% 5.8% 4.6% 5.0% Accounts receivable 8,014 11,394 12,171 12,349 13,415 SG&A/Sales 5.2% 5.3% 5.0% 5.0% 4.5% Inventories 7,315 6,697 8,114 8,233 8,943 Others 20,937 18,068 17,786 17,876 18,408 Interest coverage (x) Current assets 57,173 49,381 39,615 40,513 42,199 Net debt to equity 8.8% 32.9% 61.2% 78.5% 87.9% Sales/assets LT investments 7,637 8,863 8,863 8,863 8,863 Assets/equity Net fixed assets 60,853 85, , , ,883 Total Assets 162, , , , ,706 ROE 12.7% 10.4% 4.9% 3.9% 4.5% a ROA 7.0% 5.1% 2.2% 1.6% 1.7% Liabilities ROCE 10.9% 7.8% 3.6% 2.9% 3.3% Short-term loans 3,062 6,541 6,541 6,541 6,541 Payables 11,003 16,102 16,548 16,945 18,192 Others 15,760 11,483 10,526 10,779 11,572 Total current liabilities 29,824 34,126 33,615 34,266 36,306 Long-term debt 26,411 40,077 58,000 78,000 90,000 Other liabilities 9,043 10,064 10,225 10,225 10,225 Total Liabilities 65,278 84, , , ,531 Shareholder's equity 82,525 86,726 88,260 90,418 93,481 BVPS Source: Company reports and J.P. Morgan estimates. 20