August 29, 2011 (Yosua Nainggolan) According to Sun Tzu, “If you know the enemy and know yourself, you need not fear the result of a hundred battles.” For the Chinese coal giants today, the battles are happening deep in the mines, and victory is won up in the stock markets. Two major “enemies” of Yanzhou Coal (NYSE: YZC) would be China Shenhua Energy Co. Ltd. (HKG:1088) and China Coal Co. Ltd. (HKG:1898). Together with Yanzhou Coal (NYSE:YZC), these three giants compose more than 90% of the Chinese coal industry, with China Shenhua (HKG:1088) alone taking more than 60% of it and has become more valuable than U.S. giant Peabody Energy (NYSE:BTU).
With the global increase in coal demand in the last 5 years, all three companies have enjoyed steady and promising growth. As the sizes of these three companies are noticeably different, there are also differences in the rate at which certain financial aspects of these companies have grown throughout the last 5 years.
Going from RMB23,458.70 million to RMB72,755.90 million in merely 5 years in certainly something Yanzhou Coal Mining (NYSE:YZC) should be proud of. Through a series of major acquisitions of mining complexes all around the country, Yanzhou coal more than doubled its size and income, enjoying an average Total Asset growth of 36% annually. The company does not look it will be slowing down anytime soon either. In recent news, Yanzhou just purchased two Australian coal producers, Syntech Holdings Pty Ltd and Syntech Holdings II Pty Ltd for $222.08 million in cash. This transaction is similar to a number of Yanzhou Coal’s past deals which utilize mostly cash. The effect of this pattern can be seen in Yanzhou Coal’s relatively low annual cash balance, which in 2010 was even lower than their Net Income. Yanzhou Coal Mining (NYSE:YZC) has been relatively efficient in managing their expenses, evident by the steady growth rate of their Net Income as compared to Revenue.
Yanzhou Coal’s biggest competitor, China Shenhua Energy Co Ltd. (HKG:1088) has also been doing well in the past 5 years. As the company is bigger and older than Yanzhou Coal, China Shenhua Energy (HKG:1088) has been experiencing a less dramatic climb in Total Asset numbers. In 5 years, China Shenhua Energy’s Total Assets almost doubled from RMB172,360 million to RMB340,860 million, with an average annual growth of 19%. Although net income growth is slightly lagging behind revenue growth, the company is still showing signs of healthy growth, especially in its average annual cash growth of 68%. China Shenhua Energy (HKG:1088) is currently looking to own 40% in the western Tsankhi block of Mongolia’s Tavan Tolgoi coal, one of the world’s biggest coking coal deposits. China Shenhua Energy (HKG:1088) will be sharing the project with a Russian-led consortium (36%) and US mining giant Peabody Energy (NYSE:BTU) (24%). Although there are currently many complaints by Japanese and Korean firms concerning the bidding process to this project, the Tavan Tolgoi coal project will be a major profit-generator for any entity controlling it.
Like Yanzhou Coal and China Shenhua Energy, China Coal Energy Co Ltd (HKG:1898) has also been experiencing remarkable growth in the last 5 years. Total Assets almost tripled from RMB45,113.7 million in 2006 to RMB122,936 million in 2010, with an average annual growth rate of 31%. Like Yanzhou Coal, China Coal (HKG:1898) seems to be doing a good job in managing its operations, proven by its 25% average annual revenue growth that is paired with a 28% average annual net income growth. From a cash perspective, China Coal (HKG:1898) has been increasing its cash balances for quite some time now, growing an average of 37% annually, from as low as only RMB 4,278 million in 2007 to 2010’s RMB22,922 million. If we look deeper into the financial statement, a considerable amount of these cash increase is caused by an RMB18,190 million decrease in placement of term deposits. The company may be looking to gather enough cash for a major expansion, much like those done by its competitors.
After analyzing each company’s growth characteristics, we can see that all three companies are going through promising growth phases, and should be considered by any investor looking to ride along the Chinese coal industry boom. Yanzhou Coal (NYSE:YZC) looks to be putting as much money and effort as possible in expanding their operations, with hopes of great returns in the future. China Shenhua Energy, the more experienced and established, is already sharing major projects with an old-timer like Peabody Energy (NYSE:BTU).
Looking at P/E ratios, Reuters.com has the industry average at 22.57 with Yanzhou Coal (NYSE:YZC), China Shenhua Energy (HKG:1088), and China Coal Energy (HKG:1898) at 12.61, 16.52, and 16.48 respectively. Yanzhou Coal seems to be valued pretty low among its competitors. We believe that one of the main reasons YZC is not valued as highly is because of its rather poor cash management. The number from operating cash flow seems to be declining in the past couple of years, which in 2010 is caused by the great change in net working capital. Some analysts also argue that it is the company's slight increases in cash conversion cycle over the past couple of years. This means Yanzhou Coal Mining Co. (NYSE:YZC) is taking more and more time converting resource inputs into cash flows. However, with its strong finances and great expansion potential, Yanzhou Coal can still be a highly profitable investment.
From a broader point of view, all three companies have actually been sliding down in prices since early August. We believe that this is directly caused by the significant drop in oil prices. Ever since its July high of $100, oil prices have dropped down and are currently fluctuating in the mid-to-low $80s. As coal prices correlate very closely to oil prices in China, a similar downward movement will also be evident in the value of these coal companies.
It is clear that the company is very generous in using its resources to invest in new and promising coal projects. We believe that its current unfavorable price standings are not the result of Yanzhou Coal’s own incompetence, but rather a global trend across the current industry. When things start picking up for the energy industry as a whole, we believe that Yanzhou Coal’s will really increase in value and may even surpass that of Peabody Energy (NYSE:BTU).