china: metals & mining: coalpg.jrj.com.cn/acc/res/cn_res/indus/2016/9/8/c70bf... · september...

September 8, 2016

China: Metals & Mining: Coal

Equity Research

New Old China: Expect output cut to loosen, capping price upside

Supply: Output cut may loosen in near term, capping price upside

One of the biggest surprises this year in China’s commodities space is the

domestic coal output cut (Jan-Jul down 10% yoy). The implementation of the

276-day rule (from 330 days previously) announced in April, which came in

more restrictive than we and the market expected, has resulted in a domestic

supply shortfall and triggered the coal price hike since late May. However,

according to Taiyuan Coal Transaction Center, China is considering loosening

the 276-day requirement for “advanced” coal mines. Assuming this occurs, we

think it should ease the current supply shortage and limit upside to the coal

price in the near term. In addition, we expect an accelerated rate of capacity

closure in Aug-Dec (achieving 62% of the government’s annual target), and

believe permanently shutting down capacity is a more feasible long-term

solution to manage oversupply vs. temporary output control.

Demand: 1H decline in line with GSe, LT downward trend intact

China’s coal demand dropped 4.6% yoy in 1H16, in line with our full-year

estimate of -5%. We expect demand to continue to decline 5% yoy in 2H based

on softening downstream demand for coal-fired power generation and steel

production as well as greater efficiency gains.

Inventory/import to continue to replenish the supply gap

The domestic supply gap created by the 276-day rule has been replenished by

coal inventory and imports. Ytd China’s coal inventory has dropped 143mt,

and inventory at ports and power plants are both at 5-year lows. Coal imports

reversed the multi-year trend of sequential declines and grew 34%/31% yoy in

May/June, resulting in the seaborne coal price surging 36% since April. We

now expect inventory to continue to drop and imports to remain above 200mt

in 2016-17E in order to replenish the supply gap. In the near term, we expect

the domestic price will remain at a high level, but with limited upside into Sep-

Oct due to seasonal weakness and possible loosening of the 276-day rule.

Longer term, we raise our QHD spot thermal coal price forecast 14-17% to

427/450/450 Rmb/t in 2016-18 to mark to market.

Updating earnings/TPs post 1H results for China Coal; Neutral

We raise our earnings estimates for China Coal post 1H16 results and now

expect the company to make a profit in 2016-18E on our higher coal price

forecast, lower production cost and greater financial cost savings. On this,

we raise H/A 12m P/B vs. ROE-based TPs to HK$3.9/Rmb5.6 (up 26%/14%).

Maintain Neutral on H/A with 3%/1% implied TP downside.

OUR 12M TPS AND RATINGS FOR CHINA COAL (H/A)

Note: Close price as of Sep 8; H in HK$, A in Rmb

Source: Datastream, Goldman Sachs Global Investment

Research, Gao Hua Securities Research.

RELATED RESEARCH

China Coal: First Take: 1H beat; higher coal ASP and lower

cost a positive surprise, August 25, 2016

China: Metals & Mining: The New Old China: All local govts’

capacity cuts target to be out by end July, July 8, 2016

China: Metals & Mining: The New Old China - Why capacity

exits will accelerate from 2H16, June 27, 2016

Julian Zhu +86(21)2401-8978 [email protected] Beijing Gao Hua Securities Company Limited Goldman Sachs 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. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.

Yan Yan +852-2978-7143 [email protected] Goldman Sachs (Asia) L.L.C. Christina He, CFA +852-2978-0223 [email protected] Goldman Sachs (Asia) L.L.C. Claire Wang +86(21)2401-8923 [email protected] Beijing Gao Hua Securities Company Limited

The Goldman Sachs Group, Inc. Global Investment Research

Coal Ticker Rating TPClosing

pricePotential up/down

China Coal (H) 1898.HK Neutral 3.90 4.02 -3%

China Coal (A) 601898.SS Neutral 5.60 5.68 -1%

September 8, 2016 China: Metals & Mining: Coal

Goldman Sachs Global Investment Research 2

Table of contents

Supply: Output cut loosening in the near term, price upside capped 2

Demand: 1H decline in line with GSe; LT downward trend intact 4

Inventory and import to continue to replenish the supply gap 5

China coal supply-demand model 7

Updated earnings and TPs for China Coal 8

Disclosure Appendix 11

The prices in the report are as of the market close of Sep 8, 2016, unless stated otherwise.

Supply: Output cut loosening in the near term, price upside capped

Implementation of 276-day rule came in stricter than we expected

In April, NDRC issued a document urging all the coal mines in China to produce on a 276-

working-day basis from the previous 330 days, which would effectively reduce certified

coal capacity by 16%. The implementation of the policy has been stricter than we expected.

As a result of the rule, we have seen a sharp drop in coal output from April to July.

The output cut was led by Shanxi and Inner Mongolia, the two largest coal producing

provinces in China (c. 50% of China’s total output), where the combined output fell sharply

by 19%-22% yoy in April to June vs. a still sizable 11%-17% drop in national output (see

Exhibit 2).

Exhibit 1: Coal output has dropped sharply yoy since

April… Raw coal production and yoy

Exhibit 2: …led by output cuts in Shanxi and Inner

Mongolia Shanxi and Inner Mongolia monthly coal output yoy

Source: NBS, SXCoal.

Source: NBS, SXCoal.

We think a higher percentage of SOE capacity is a major reason driving the immediate

output decline in Shanxi and Inner Mongolia where SOE capacity accounts for 82% and

63%, respectively, of total capacity.

-40%

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Raw coal production

Yoy (RHS)

mt

-4%

-18%

-8%

-5%

-5%

-1%

3%

-6%

-1%-4%

-13%

-1%

-17%

-5%

-19%

-19%-22%-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16

Monthly coal production yoyShanxi and Inner Mongolia



Potential loosening of the 276-day rule in the near term

In the near term, we expect the Chinese government to loosen the 276-day rule for

“advanced” coal mines (lower emission, less labor intensive, higher efficiency and lower

cost). As reported by Taiyuan Coal Transaction Center, 76 key coal companies have applied

to resume production and some of the advanced SOE coal mines have already moved back

to the 330-day basis. This may alleviate some of the current supply shortage in the

domestic market and cap further upside of the coal price in the near term, but we don’t

expect China to allow output to go back to the same production level as before the April

work day change.

As such, we now expect the coal price to sustain at the recent level, but that further upside

in the near term should be limited as: 1) on the supply side, the recent price rally may

trigger flexibility around the 276-day policy; and 2) on the demand side, Sep/Oct demand

typically weakens sequentially before picking up in the winter when coal demand for

heating is high.

More capacity shutdown to come in 2H

Looking into the 2H, we expect an accelerated rate of capacity closure in the coal space as

the coal sector is a laggard in terms of meeting the supply-side reform target completion

rate. In January to July, 95mt coal capacity was shut down, achieving only 38% of the full

year target. We think the Central Government is focused on pushing forward the supply-

side reform, as evidenced by the successive policy announcements in the 1H (see “China

Metals & Mining: Successive policies to support supply-side reform; Buy Cements”, May

19, 2016). This provides us with confidence that China will reach the target of 250mt

closure this year and 500mt closure in the next 3-5 years.

In our view, the 276-working-day rule is more of a temporary output restriction rather than

a long-term solution for oversupply in the coal industry. Eventually, closure of excessive

coal capacity will be the best means to restore the supply demand balance in China.

Exhibit 3: Aug-Dec coal capacity closure plan is 62% of the government’s full year target Planned annual coal capacity closure

Source: NDRC, Goldman Sachs Global Investment Research.

95

150

100

155

0

50

100

150

200

250

300

2016E 2017E 2018E

Planned coal capacity closure

Jan-Jul

closure:

38% of

annual

target

Aug-Dec

target: 62%

of annual

target

mtpa



Demand: 1H decline in line with GSe; LT downward trend intact

China’s coal demand dropped 4.6% yoy in 1H according to China Coal Transportation &

Sale Society, in line with our full-year estimate of -5% yoy. We expect demand to continue

to drop 5% yoy in 2H, implying 2016 full-year demand decline of 5%, driven by our

assumptions of: 1) 2% yoy decline in coal-fired power generation; 2) 1% yoy decline in steel

production; 3) 2% yoy increase in cement production; and 4) 3% efficiency gains across all

downstream sectors.

The 1H16 drop consisted of:

Coal consumption in the power sector dropped by 5.8% yoy, accounting for 49%

of total demand

Coal consumption in the steel sector fell by 4.6% yoy, accounting for 17% of total

demand

Coal consumption in the cement sector grew by 0.4% yoy, accounting for 13% of

total demand

Exhibit 4: China’s monthly power generation

Monthly power generation yoy and ytd yoy

Exhibit 5: Power generation ytd yoy – thermal vs. hydro

Thermal and hydro power generation ytd yoy

Source: NBS, CEIC.

Source: NBS, CEIC.

Exhibit 6: Crude steel monthly production

Exhibit 7: Cement monthly production

Source: NBS, CEIC.

Source: NBS, CEIC.

7.2

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China monthly power generation yoy %China power generation ytd yoy %

13%

-2%

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15%

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25%

30%

35%

Jan

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Hydro power ytd yoy Thermal power ytd yoy

676565666565

6162

6565

7069706968696868

63

686565

6969706966676666

63646161

7169716967

7.3%

4.6%

6.1%

12.8%

11.0%9.2%

4.2%

6.5%

2.8%

5.8%

2.2%2.1%

2.6%

4.5%

1.5%

1.0%0.0%-0.3%

-0.2%1.5%-0.2%

-0.2%

2.1%

-0.7%-1.7%-0.8%

-4.6%

-3.5%

-3.0%-3.1%

-1.6%

-5.2%-7.2%

-7.2%

2.9%

0.5%

1.8%1.7%

2.6%

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Monthly crude steel production (LHS) yoy % (RHS)mt %

224

228212

215225

233224

205

120120

205

226

234232

223225

224

234

219

204

132132

161

209

220218

212215

218225

205198

119119

201

216227223

214

8.5%

8.8%9.1%

8.2%6.4%

8.9%10.0%

10.8%

2.4%2.4%

5.9%

3.9%3.2%

0.8%3.5%

3.0%

-2.2%

-1.1%-4.0%

-1.4%

11.2%11.2%

-20.5%

-7.3%

-5.4%

-5.8%

-4.7%

-4.2%

-2.5%

-3.5%

-6.6%-3.7%

-8.2%-8.2%

24.0%

2.8%

2.9%2.6%

0.9%

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Monthly cement production (LHS) yoy % (RHS)mt



In the long run, we expect China coal demand to continue on a structural downward trend

as a combined result of: 1) the ongoing capacity curtailment of the marginal polluting

capacity of cement, steel, glass, paper and coal chemicals; 2) further improvement in

energy efficiency per unit of growth; and 3) more importantly, the rising contribution of

non-fossil energy to China’s overall primary energy generation by 2020.

Exhibit 8: China’s energy mix by 2020E We expect non-coal energy to grow from 23% of total power generation in 2010 to 42% in 2020

Source: China Electricity Council, National Energy Association, NBS, Goldman Sachs Global Investment Research.

Inventory and import to continue to replenish the supply gap

As discussed in the previous sections, China’s coal production dropped by 10% in 1H16

while demand only fell by 5%, thus creating a supply gap which was replenished by coal

inventory and imports.

Inventory fell sharply to bridge the gap of supply contraction

According to SXCoal, China’s total coal inventory dropped to 197mt in July vs. 340mt in

December 2015, representing a decline of 143mt (42%) since the beginning of the year.

Coal Hydro Wind Natural gas Nuclear Solar Others

Total generation capacity

683GW 216GW 30GW 26GW 11GW Insignificant

amountInsignificant

amount

2010 % of capacity 71% 22% 3% 3% 1%Insignificant

amountInsignificant

amount

966GW % of power generation

77% 17% 1% 2% 2%Insignificant

amountInsignificant

amount

6% 8% 34% 20% 19% N/M N/M


924GW 319GW 129GW 66GW 26GW 42GW Insignificant

amount

2015 % of capacity 61% 21% 9% 4% 2% 3%Insignificant

amount

1,507GW % of power generation

70% 19% 3% 3% 3% 1%Insignificant

amount

1% 5% 12% 9% 16% 26% N/M


963GW 400GW 225GW 100GW 54GW 130GW Insignificant

amount

2020E % of capacity 51% 21% 12% 5% 3% 7%Insignificant

amount

1,873GW % of power generation

58% 21% 7% 5% 6% 3%Insignificant

amount

Government target


1,100GW 410GW 250GW 100GW 58GW 150GWInsignificant

amount

2010-2015E generation capacity CAGR (%)

2015E-2020E generation capacity CAGR (%)



Coal inventory at the major ports in North China is 13mt (Sep 2), down 35% yoy.

Overall, ytd inventory at ports is the lowest level in the past five years.

Coal inventory at power plants also hit the 5-year low at 48mt, with only 12

inventory days (as at Aug 20).

Exhibit 9: Coal inventory at ports Coal inventory at 9 major ports in North China

Exhibit 10: Coal inventory at power producers Coal inventory in power producers

Source: Bloomberg.

Source: SXCoal.

Imports reversed the multi-year trend of sequential declines

China’s coal imports have been declining since 2014 as a result of excessive supply and

sluggish demand growth. However, we have seen a pick up in coal import volume from

May and June (up 34%/31% yoy) caused by the deep supply cut in the domestic market. At

the same time, we have seen a surge in the seaborne coal price, with New Castle FOB price

rising 36% from the ytd low at the end of April. The surge in the seaborne coal price plus

the deprecation of Rmb have resulted in a positive price gap of the seaborne coal price

(Australia) over the domestic coal price of 22 and 264Rmb/t for thermal and coking coal,

respectively.

We now expect imports to remain above 200mt in 2016-17E before falling to 200mt in

2018E (our prior forecast was 190/170/160mt). However, with the widening price gap, we

also expect a price correction of seaborne coal as a result of the arbitrage opportunity.

30.2

23.8

12.0

17.2

13.5

13.0

-

5.0

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15.0

20.0

25.0

30.0

35.0

Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16

Coal inventory at major ports in North Chinamt

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Coal inventory in power producers (LHS)

Inventory days (RHS)

Daysmt



Exhibit 11: China’s monthly import volume

Exhibit 12: Price gap – seaborne vs. domestic thermal

Source: China Customs.

Source: SXCoal, McCloskey, Datastream

China coal supply-demand model

Reflecting the analysis of supply demand dynamics as discussed above and marking to

market for the recent price increases, we update our coal supply demand model and price

forecast. We now forecast QHD spot thermal’s annual average spot price at

Rmb427/450/450 Rmb/t for 2016-18E vs prior Rmb375/383/390 Rmb/t.

Exhibit 13: China’s coal supply demand model

Source: SXCoal, NBS, CEIC, Goldman Sachs Global Investment Research.

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Coal import

mt

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Seaborne - domestic price gap (RHS)

Domestic thermal CIF (LHS)

Australia thermal CIF (LHS)

Rmb/t Rmb/t

(mn tonnes) 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E

Nominal capacity 2,256 2,581 2,812 3,102 3,459 3,842 4,201 4,555 4,800 4,973 4,813 4,744

New capacity 270 231 320 387 413 399 399 295 237 90 81 73

Shut down of small coal mines 30 30 30 40 45 50 64 250 150 100

Total coal capacity 2,581 2,812 3,102 3,459 3,842 4,201 4,555 4,800 4,973 4,813 4,744 4,717Utilization 114% 108% 105% 104% 103% 98% 91% 83% 75% 70% 71% 70%

Raw Coal production 2,760 2,903 3,115 3,428 3,764 3,945 3,974 3,874 3,685 3,417 3,371 3,320

yoy growth 9% 5% 7% 10% 10% 5% 1% -3% -5% -7% -1% -2%

Coal Net Import (15) (5) 103 166 208 280 319 285 199 211 211 191

Import 38 40 126 185 222 289 327 291 204 220 220 200

Export 53 45 22 19 15 9 8 6 5 9 9 9

Balance of S-D 164 150 (7) (50) 25 (74) (56) (46) 83 0 0 0

Commercial Coal Supply 2,909 3,048 3,212 3,544 3,997 4,151 4,237 4,113 3,967 3,628 3,582 3,511yoy growth 5% 5% 10% 13% 4% 2% -3% -4% -9% -1% -2%

Coal Demand 2,904 3,006 3,250 3,490 3,890 4,117 4,244 4,116 3,964 3,764 3,623 3,527

yoy growth 7% 4% 8% 7% 11% 6% 3% -3% -4% -5% -4% -3%

Coal Inventory 149 191 153 206 313 347 340 337 340 204 163 147

Days of Inventory 19 23 17 22 29 31 29 30 31 20 16 15

Inventory Change 5 42 (38) 54 107 34 (7) (3) 3 (136) (41) (16)

Rmb/t, VAT incl.

Spot thermal coal at QHD (5500kcal/kg) 466 725 600 745 819 704 590 518 411 427 450 450

yoy growth 9% 56% -17% 24% 10% -14% -16% -12% -21% 4% 5% 0%



Exhibit 14: Industry sales decline narrowed and loss

partially recovered in 1H China coal industry’s total loss yoy and revenue yoy

Exhibit 15: Industry receivables and inventory dropped

China coal industry’s total receivables yoy and inventory yoy

Source: NBS, CEIC.

Source: NBS, CEIC.

Updated earnings and TPs for China Coal

China Coal reported above-expectation 1H16 net profit (IFRS) of Rmb225mn compared to

Rmb1.1bn loss in 1H15 and our prior estimate of Rmb2.5bn loss in FY16E. 1H sales and

gross profit were both in line at Rmb26bn and Rmb3bn, respectively, -12%/+15% yoy, and

accounted for 50%/49% of prior FY16 GHe. Gross margin expanded 2.7ppt yoy to 11.4%

due to cost control in the coal segment (self-produced coal GM +7ppt yoy). Please refer to

“China Coal: First Take: 1H beat; higher coal ASP and lower cost a positive surprise”

published on August 25, 2016 for our detailed analysis.

We revise our earnings forecast for China Coal to reflect 1H financials and operating data

trends. Notably, we now expect the company to generate a profit in 2016-18E vs. be loss

making on: 1) our higher coal price forecast (driving an 10-13% increase in revenue vs.

prior estimates); 2) lower costs (benchmarked to 1H cost level); 3) recovery of coal-

chemical product prices in the 2H; and 4) lower net financing cost due to lower net debt as

a result of better operating cash flow.

Our new estimates imply Rmb600mn core earnings in 2H16 vs. Rmb447/257mn core loss in

1Q/2Q as the higher coal price since May flows into 2H earnings.

Exhibit 16: Earnings revisions for China Coal (in Rmb mn)

Source: Company data, Bloomberg, Goldman Sachs Global Investment Research, Gao Hua Securities Research

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Industry toal loss yoy

Industry revenue yoy (RHS)

% %

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Receivables yoy

Product inventory yoy

%

Net profit 2015 2016E 2017E 2018ENew (3,267) 825 1,117 1,562

yoy nm 35% 40%Old (3,267) (2,482) (1,929) (1,256)

vs. old nm nm nmBloomberg consensus (460) 248 612

vs. consensus nm 351% 155%



We raise our H/A TPs to HK$3.90 (was HK$3.10) and Rmb5.60 (was Rmb4.90) on our

estimate changes.

We continue to base our 12-month target prices on P/B vs. ROE, and our valuation time-

horizon reference is the average in 2012-17E (unchanged) when we calculate the sector

multiple and intercept and valuation premium/discount.

Our multiple/intercept are unchanged for our H-share coverage at 2.7X/0.75 and A-share

coverage at 1.9X/1.15 over 2012-17E. Our valuation discounts are unchanged too, in line

with the respective historical average for H/A.

Key risks to our TPs are higher-/lower-than-expected coal price, coal chemical product

prices, and costs.

Exhibit 17: H-share target price derivation – P/B vs. ROE

Exhibit 18: A-share target price derivation – P/B vs. ROE

Source: Datastream, Goldman Sachs Global Investment Research, Gao Hua Securities Research.

Source: Datastream, Goldman Sachs Global Investment Research, Gao Hua Securities Research.

China Coal (H)Sector Valratio (PB vs. ROE) 2.7Intercept 0.75

FY17E ROE 1%Cycle avg ROE (2012-17E) 2.2%

FY17E BVPS (Rmb) 6.5Exchange adjustment 1.07

Valuation prem./disc. adjustment -28%Last prem./disc. applied -28%

Historical avg prem. (2012-17E) -28%

Rationale

Target price HK$ 3.90Current price 4.02

Potential upside/downside -3%

Previous target prices 3.10

Change from previous 26%

Rating Neutral

Implied FY17E PBR 0.6x

In line with historical

average

China Coal (A)Sector Valratio (PB vs. ROE) 1.9Intercept 1.15

FY17E ROE 1%Cycle avg ROE (2012-17E) 2.2%

FY17E BVPS (Rmb) 6.5Exchange adjustment 1.00

Valuation prem./disc. adjustment -26%Last premium/disc. applied -26%

Historical avg prem. (2012-17E) -26%

Rationale

Target price Rmb 5.60Current price 5.68

Potential upside/downside -1%

Previous target prices 4.90

Change from previous 14%

Rating Neutral

Implied FY17E PBR 0.9x

In line with historical

average



China Coal Energy (H): Summary financials

Profit model (Rmb mn) 12/15 12/16E 12/17E 12/18E Balance sheet (Rmb mn) 12/15 12/16E 12/17E 12/18E

Total revenue 59,270.9 58,003.1 62,662.3 67,041.1 Cash & equivalents 11,195.7 13,306.5 14,340.3 14,708.2

Cost of goods sold (55,167.1) (50,926.8) (54,720.1) (58,377.7) Accounts receivable 13,268.9 13,340.7 13,159.1 14,078.6

SG&A (4,400.3) (4,306.2) (4,338.8) (4,306.8) Inventory 6,825.0 6,300.5 6,769.7 7,222.3

R&D -- -- -- -- Other current assets 30,728.9 30,071.6 32,487.2 34,757.4

Other operating profit/(expense) 339.8 1,268.8 1,268.8 1,268.8 Total current assets 62,018.6 63,019.3 66,756.4 70,766.5

EBITDA 7,079.0 10,588.2 11,837.6 12,954.7 Net PP&E 128,805.2 136,428.1 140,010.5 143,874.8

Depreciation & amortization (7,035.8) (6,549.4) (6,965.4) (7,329.3) Net intangibles 39,096.1 38,632.6 38,169.1 37,705.6

EBIT 43.2 4,038.8 4,872.3 5,625.4 Total investments 18,667.1 19,229.2 19,836.3 20,485.9

Interest income 965.7 808.5 961.0 1,035.6 Other long-term assets 9,439.0 9,722.2 10,013.9 10,314.3

Interest expense (4,946.9) (4,914.1) (5,334.3) (5,707.3) Total assets 258,026.0 267,031.3 274,786.1 283,147.1

Income/(loss) from uncons. subs. 362.3 562.0 607.2 649.6

Others 0.0 0.0 0.0 0.0 Accounts payable 20,665.7 21,623.6 23,234.2 24,787.2

Pretax profits (3,575.7) 495.2 1,106.0 1,603.4 Short-term debt 32,650.2 18,086.7 18,766.9 19,505.1

Income tax 748.2 269.3 (124.7) (238.4) Other current liabilities 14,330.9 14,330.9 14,330.9 14,330.9

Minorities (439.3) 60.8 135.9 197.0 Total current liabilities 67,646.8 54,041.2 56,332.0 58,623.3

Long-term debt 80,376.0 102,491.1 106,345.5 110,529.0

Net income pre-preferred dividends (3,266.8) 825.4 1,117.2 1,561.9 Other long-term liabilities 9,720.8 9,512.9 10,277.1 10,995.2

Preferred dividends 0.0 0.0 0.0 0.0 Total long-term liabilities 90,096.8 112,004.0 116,622.6 121,524.2

Net income (pre-exceptionals) (3,266.8) 825.4 1,117.2 1,561.9 Total liabilities 157,743.6 166,045.1 172,954.5 180,147.5

Post-tax exceptionals 0.0 0.0 0.0 0.0

Net income (3,266.8) 825.4 1,117.2 1,561.9 Preferred shares 0.0 0.0 0.0 0.0

Total common equity 83,707.6 84,533.0 85,650.2 87,212.1

EPS (basic, pre-except) (Rmb) (0.25) 0.06 0.08 0.12 Minority interest 16,574.9 16,453.2 16,181.4 15,787.4

EPS (basic, post-except) (Rmb) (0.25) 0.06 0.08 0.12

EPS (diluted, post-except) (Rmb) (0.25) 0.06 0.08 0.12 Total liabilities & equity 258,026.0 267,031.3 274,786.1 283,147.1

DPS (Rmb) 0.00 0.00 0.00 0.00

Dividend payout ratio (%) 0.0 0.0 0.0 0.0 BVPS (Rmb) 6.31 6.38 6.46 6.58

Free cash flow yield (%) (15.1) (6.3) (4.8) (6.6)

Growth & margins (%) 12/15 12/16E 12/17E 12/18E Ratios 12/15 12/16E 12/17E 12/18E

Sales growth (16.1) (2.1) 8.0 7.0 CROCI (%) 2.1 4.2 3.1 3.4

EBITDA growth (11.0) 49.6 11.8 9.4 ROE (%) (3.8) 1.0 1.3 1.8

EBIT growth (98.3) NM 20.6 15.5 ROA (%) (1.3) 0.3 0.4 0.6

Net income growth NM 125.3 35.3 39.8 ROACE (%) 0.2 1.9 2.0 2.3

EPS growth (2,415.3) 125.3 35.3 39.8 Inventory days 51.1 47.0 43.6 43.7

Gross margin 6.9 12.2 12.7 12.9 Receivables days 82.3 83.7 77.2 74.1

EBITDA margin 11.9 18.3 18.9 19.3 Payable days 145.8 151.5 149.6 150.1

EBIT margin 0.1 7.0 7.8 8.4 Net debt/equity (%) 121.7 126.9 129.3 132.2

Interest cover - EBIT (X) 0.0 1.0 1.1 1.2

Cash flow statement (Rmb mn) 12/15 12/16E 12/17E 12/18E Valuation 12/15 12/16E 12/17E 12/18E

Net income pre-preferred dividends (3,266.8) 825.4 1,117.2 1,561.9

D&A add-back 7,035.8 6,549.4 6,965.4 7,329.3 P/E (analyst) (X) NM 51.8 38.9 27.8

Minorities interests add-back 439.3 (60.8) (135.9) (197.0) P/B (X) 0.5 0.5 0.5 0.5

Net (inc)/dec working capital 794.8 1,410.8 1,322.9 181.0 EV/EBITDA (X) 23.3 15.9 14.4 13.5

Other operating cash flow (2,663.5) 95.3 (3,022.8) (2,919.8) EV/GCI (X) 0.7 0.7 0.6 0.6

Cash flow from operations 2,339.7 8,820.0 6,246.9 5,955.4 Dividend yield (%) 0.0 0.0 0.0 0.0

Capital expenditures (11,371.7) (12,585.9) (9,069.3) (9,843.6)

Acquisitions 0.0 0.0 0.0 0.0

Divestitures 0.0 0.0 0.0 0.0

Others (14,950.5) (1,614.0) (542.5) (468.7)

Cash flow from investments (26,322.2) (14,199.9) (9,611.8) (10,312.3)

Dividends paid (common & pref) (319.8) 0.0 0.0 0.0

Inc/(dec) in debt 17,802.4 7,551.5 4,534.6 4,921.8

Common stock issuance (repurchase) 0.0 0.0 0.0 0.0

Other financing cash flows (436.3) (60.8) (135.9) (197.0)

Cash flow from financing 17,046.3 7,490.7 4,398.8 4,724.8

Total cash flow (6,936.2) 2,110.8 1,033.8 367.9 Note: Last actual year may include reported and estimated data.

Source: Company data, Goldman Sachs Research estimates.



Disclosure Appendix

Reg AC

We, Julian Zhu, Yan Yan, Christina He, CFA and Claire Wang, hereby certify that all of the views expressed in this report accurately reflect our

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directly or indirectly, related to the specific recommendations or views expressed in this report.

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Disclosures

Coverage group(s) of stocks by primary analyst(s)

Julian Zhu: Asia Commodities Companies. Yan Yan: Asia Commodities Companies.

Asia Commodities Companies: ACC Ltd., Aluminum Corp. of China (A), Aluminum Corp. of China (H), Ambuja Cements, Angang Steel (A), Angang

Steel (H), Anhui Conch Cement (A), Anhui Conch Cement (H), Baoshan Iron & Steel, BBMG Corp. (A), BBMG Corp. (H), Beijing Enterprises Water

Group, Beijing Originwater Technology, Beijing Water Business Doctor, China Coal Energy (A), China Coal Energy (H), China Conch Venture Holdings,

China Everbright International Ltd., China Hongqiao Group, China Molybdenum Co., China National Building Material, China Resources Cement

Holdings, China Shenhua Energy (A), China Shenhua Energy (H), Dongjiang Environmental Co. (A), Dongjiang Environmental Co. (H), GrandBlue

Environment Co., Jiangxi Copper (A), Jiangxi Copper (H), Korea Zinc, Maanshan Iron & Steel (A), Maanshan Iron & Steel (H), Shree Cement Ltd.,

Tianjin Capital Environmental (A), Tianjin Capital Environmental (H), Tianjin Motimo Membrane Tech, TUS-Sound, Ultratech Cement, Yanzhou Coal

Mining (A), Yanzhou Coal Mining (H), Zhaojin Mining Industry, Zijin Mining (A), Zijin Mining (H).

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covered by the Global Investment Research Division of Goldman Sachs and referred to in this research.

Goldman Sachs had a non-securities services client relationship during the past 12 months with: China Coal Energy (A) (Rmb5.68) and China Coal

Energy (H) (HK$4.02)

Goldman Sachs makes a market in the securities or derivatives thereof: China Coal Energy (A) (Rmb5.68) and China Coal Energy (H) (HK$4.02)

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Buy Hold Sell Buy Hold Sell

Global 31% 54% 15% 66% 60% 50%

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provided investment banking services within the previous twelve months.



Price target and rating history chart(s)

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4.1

3.94.28

4.24.11

4.96

2

1.8 3

3.1

6,0007,0008,0009,00010,00011,00012,00013,00014,00015,00016,000

1.001.502.002.503.003.504.004.505.005.506.00

China Coal Energy (H) (1898.HK)

Goldman Sachs rating and stock price target history

Stock Price Currency : Hong Kong Dollar

Source: Goldman Sachs Investment Research for ratings and price targets; FactSet closing prices as of 6/30/2016.

The price targets show n should be considered in the context of all prior published Goldman Sachs research, which may or may not have included price targets, as w ell as developments relating to the company, its industry and financial markets.

Rating

Price target

Price target at removal

Covered by Julian Zhu

Not covered by current analyst

Hang Seng China Ent. Index

Inde

xPr

ice

Sto

ckPr

ice Sep 18 Mar 23

N SA

NS O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J

2013 2014 2015 2016

4.9 3.8 3.9

5.5

65.59 3.6

4.9

2,000

2,500

3,000

3,500

4,000

4,500

5,000

5,500

6,000

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

China Coal Energy (A) (601898.SS)

Goldman Sachs rating and stock price target history

Stock Price Currency : Chinese Renminbi

Source: Goldman Sachs Investment Research for ratings and price targets; FactSet closing prices as of 6/30/2016.

The price targets show n should be considered in the context of all prior published Goldman Sachs research, which may or may not have included price targets, as w ell as developments relating to the company, its industry and financial markets.

Rating

Price target

Price target at removal

Covered by Julian Zhu

Not covered by current analyst

Shanghai - Shenzhen 300

Inde

xPr

ice

Sto

ckPr

ice May 13 Mar 23

N SA

NS O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J

2013 2014 2015 2016



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