Loss of Rmb79.6m, Australian production continues to ramp up

Yanzhou Coal reported Q312 net loss of Rmb79.6m (EPS –Rmb0.02), missingUBSe of Rmb0.1and consensus of Rmb0.17. Excluding forex gain of Rmb303.9m,recurring loss is Rmb384m (Rmb-0.08). Q3 and 9M12 saleable coal output rose5.9%QoQ and 19.7%YoY to 15.63mt and 45.96mt respectively, mainly driven byramp up of Yancoal Australia. Yanzhou has met 94% of our FY12 output forecasts.

Rising sales unprofitable as ASP declines, expect Q4 slight recovery

Q3 sales were up 5%QoQ to 22.5mt and 9M12 sales were up 48.3%YoY to65.8mt. Yet, ASPs decline drastically with headquarter’s ASP down 15%QoQ toRmb536/t and Yancoal Australia’s ASP declined 10%YoY to US$719/. We expectsome price recovery in Q4 as domestic benchmark coal price has risen 6% from Q3trough of Rmb615/t. As Newcastle coal price stays at current low level of US$80/t,we do not expect meaningful profit contribution form Australian operations.

Costs remain an issue, expect to rise in Q49

M12 headquarter costs rose 12%YoY to Rmb335/t, mainly caused by risingwages and policy expenses. Yancoal Australia’s cost rose 20.2%YoY toRmb506.5/t due to merger with Gloucester (GCL), rising stripping cost, equipmentlease expenses and less output from lower cost (compared to GCL) Felix andAustar. We expect Q4 cost to stay high with more maintenance work.

Valuation: price target of HK$9.23, maintain Sell rating

Our price target of HK$9.23 is based on 6.2x PE and is at 36% discount to ourNPV estimate of HK$14.52, assuming WACC of 10.4%.

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