Yanzhou is a high beta play on coal price volatility: analyst

For which the outlook is low.

It has been observed that Yanzhou coal has high financial and operating leverage to coal price volatility, the outlook for which remains low.

According to a research note from Maybank Kim Eng, it forecasts a 5% increase in coal prices from now until year-end, with earnings bottoming in 3Q14 and moving marginally higher later this year.

The report noted that cash flow is adequate to cover its high debt load with EBITDA/INT expense forecast at 1.9x in 2014E.

However, it also said that free cash flow is negative and it is believed that CAPEX will have to be cut from earlier guidance.

Here’s more from Maybank Kim Eng:

Net debt to equity was 110% at year-end 2013, up from 38% at year-end 2010, mainly due to Australian acquisitions from 2009-2011.

The thermal coal price in China continues to bounce along the bottom (+/-2%) in 2Q14 due to weak consumption and ample supply, despite improving summer seasonal factors.

Chinese coal production is down 1% YoY thru April but consumption is down 4% due to weak industrial demand growth, strong hydro generation, cheap imports, and seasonally cool temperatures.

Given Yanzhou’s business model and our outlook for coal prices, we think it is not the right time to step up and buy the shares.

We could become more positive at lower share prices or on stronger coal market fundamentals (lower supply/improving demand).