2018 A-Share Coal Sector Outlook

Dec 20, 2017 Equity Research | Coal

This is a summary of a report originally written in Chinese. Please contact us for more information of the original report. The Chinese version shall prevail in the event of any discrepancy between the two versions.

Coal prices likely to remain high; sector valuation still low

Ou Yafei SFC CE No. BFN410 oyf@gf.com.cn +86 20 8757 3009 GF Securities (Hong Kong) Brokerage Limited 29-30/F, Li Po Chun Chambers 189 Des Voeux Road Central Hong Kong

Coal prices likely to remain high; undervalued companies worth watching We

expect overall coal prices to remain relatively high in 2018. Over the mid/long term, industry improvements will mainly come from a decrease in the debt-to-asset ratio and the gradual removal of historically accumulated financial issues, as well as increasing industry concentration and high coal prices driven by SOE reform and supply-side reform. Coal sector valuation is relatively low at present. Upcoming catalysts will likely be a reversal in pessimistic expectations about coal demand, while longer-term catalysts will be improvements in demand expectations and steady earnings growth. We continue to like undervalued leading companies such as Shaanxi Coal (601225 CH), Yanzhou Coal (600188 CH), Lu'an Environmental Energy (601699 CH), Xishan Coal and Electricity Power (000983 CH), as well as Blue Flame Holding (000968 CH) which will benefit from coalbed methane industry growth in the long term. Tight demand-supply balance to continue, coal prices to remain high Thanks to

improved demand and supply-side reform, coal prices stabilized at a high level and even rose slightly during 2017, exceeding market expectations at the beginning of the year. The YTD average prices for different types of coal have risen sharply by ~60% from the 2016 average. 10M17 coal consumption and production grew 3.7% and 4.8% YoY respectively. We expect tight demand-supply to remain in place in 2018 as downstream power generation volume and crude steel production should maintain modest growth and new capacity is unlikely to be added quickly. Share prices and valuations still low The sector has risen 17% so far this year,

outperforming the SHCOMP by 11pp, marking the second year of an outperformance. However, coal is the worst performing sector by 2011-2017 share price growth with a cumulative drop of 40%, underperforming the market by 60pp. While corporate earnings have improved significantly on rising coal prices over the past two years, the recovery in sector valuation has been unimpressive. Current sector P/B and P/E (TTM) valuations of 1.4x and 12x are more than 50% lower than historical average levels. Global coal consumption to maintain mild growth over next 20 years with overall demand-supply at equilibrium Oil, coal, natural gas and other energy sources

represented 32%, 28%, 22% and 19% of the global energy consumption mix in 2015. Global coal prices have risen significantly higher than oil prices over the past two years due to decreased production. Meanwhile, global energy consumption has grown steadily with a CAGR of 1.8% during 1990-2015. China (5.0%) and India (4.2%) are the main drivers of energy consumption growth, while developed countries have shown a slow decline in their coal consumption mix. Specifically, BP estimates a coal supply shortage of 90m tonnes of oil equivalent in 2020, and shortages of 115m and 26m toe in 2025 and 2030 and a supply overhang of 118m toe in 2035. Over the long term, global coal demand and supply should stay in a tight balance with coal prices likely to remain at a medium to high level. Increasing coal price stability On the demand side, we expect the coal consumption

CAGR in China to come down from ~10% to 2-3% in the mid/long term. Based on experience from developed countries, even in the case of an economic slowdown, China is still likely to maintain power generation growth of 2-3% and crude steel output growth of 1%-3%. In addition, while China is going through energy consumption restructuring, its coal consumption mix is just declining slowly. On the supply side, China currently has legitimate coal production capacity of 3.41bn tonnes with 750m tonnes of new capacity under construction. Considering that capacity is unlikely to increase substantially in the

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Share price performance

Source: Wind

-20%

-8%

4%

16%

2016-11 2017-03 2017-07 2017-11

采掘 沪深300Mining CSI 300

Dec 20, 2017

2

2018 sector outlook

short term and that capacity cuts have been stronger than expected, we expect the domestic coal

market to maintain a supply-demand equilibrium during 2018-2020. Furthermore, the rising

proportion of long-term contracts is also helping to stabilize the selling prices of coal.

Earnings recovery likely to continue 10M17 sector pre-tax profit amounted to Rmb250.6bn, up

437% YoY. Overall sector profit has recovered to levels seen in 2012 (Rmb237bn) and 2013

(Rmb355.5bn) (vs. best sector earnings of Rmb434.2bn in 2011), while listed companies’ profits

have also returned to ~70% of 2011 levels. Upcoming improvements in the sector are likely to come

from an alleviation in historically accumulated financial burden, a decline in the debt-to-asset ratio

(currently at ~68%, 2pp shy of the peak), and decreased capex (2016 sector capex 40% below

historical high).

Sub-sector outlook: Optimistic on undervalued thermal coal, coking coal and coalbed

methane leaders; coke also worth watching

Thermal coal: We believe the average port price of 5,500kcal/kg thermal coal is likely to remain

above Rmb600/tonne. The 13 key A-share coal companies accounted for ~20% of total coal output

in 2016 with per tonne net profit of Rmb30-120; in particular, estimated 2017 full-year profit for the

nine thermal coal companies we cover are equal to 78% of that in 2011 with room for further growth.

At present, some industry leaders are trading at 8-10x 2018E forward P/E.

Coking coal: We expect the average coking coal price to remain high in 2018. The six key coal

listco accounted for 4.3% of total raw coal output and 13% of refined coal output respectively.

Estimated 2017 combined net profit represents just 62% of the 2011 amount, leaving substantial

room for future improvement. Leading companies are trading at 8-12x 2018 forward P/E.

Coke: Coke prices are more elastic than coking coal and steel prices, and are likely to remain so

amid a tight supply-demand balance. Among A-share listed companies, Kailuan Energy Chemical

(600997 CH), Meijin Energy (000723 CH), and Heimao Coking (601015 CH) have larger coke

production capacity (each above 5m tonnes).

Coalbed methane: We see substantial growth potential in the coalbed methane industry over the

next 5-10 years. We estimate that the extraction volume in Shanxi province is likely to increase by

2.4x during 2015-2020, especially considering this year’s breakthroughs regarding coalbed

methane industry marketization in the Shanxi regional market. Meanwhile, recent policy initiatives

supporting the substitution of coal with natural gas are further promoting steady demand growth in

the industry.

Risks: Lower-than-expected economic growth, power generation and crude steel production

declines causing sharp declines in coal demand, slower-than-expected progress in supply-side

reform in the coal industry, coal production exceeding expectations, faster-than-expected coal price

drops caused by a supply-demand imbalance, SOE reform falling short of expectations, and

disappointing operational improvements at coal companies.

Dec 20, 2017

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2018 sector outlook

Sector stock picks

Shaanxi Coal (601225 CH)

High growth momentum, undervalued thermal coal company Net income attributable to parent

company in 9M17 was Rmb8.07bn, up 686% YoY. Revenue per tonne was Rmb391, up 83% YoY.

The company’s coal output is basically stable with a total capacity of 93m tonnes. Capacity under

construction, its Xiao Bao Dang coal mine, has a designed capacity of 15m tonnes and approved

capacity is 8m tonnes. It is expected to be completed in 2018. The company has attractive valuation.

Even taking into account a slight fall in coal prices in 2018, the company’s forward P/E is just 9x. In

addition, the company’s capex is expected to remain low. Major shareholders hold a 63% stake;

coupled with relatively high profitability, dividend payouts are worth looking forward to.

Risks: New mine construction coming in below expectations, coal prices falling more sharply than

expected.

Yanzhou Coal (600188 CH)

Rapid organic growth and external expansion; cheap valuation Net income attributable to

parent company in 9M17 was Rmb4.78bn, up 370% YoY. The company’s coal mines are mainly

located in Shandong, Shaanxi, Inner Mongolia, and Australia. In 2018, profit growth of the company

mainly came from coal mine M&A and new capacity from the Moolarben Coal Mine, as well as

financial business which has expanded steadily and new coal mines in Inner Mongolia which have

gradually been brought into operation. Overall, the company is trading at around 9x 2018E P/E. It

is one of the few companies with relatively visible output and profit growth over the next 2-3 years;

thus, we like the company’s low valuation and growth potential.

Risks: Downstream demand being lower than expected; prices of coal, methanol and other

products falling more severely than expected.

Lu'an Environmental Energy (601699 CH)

Leading enterprise in PCI coal, likely to benefit from Shanxi SOE reform Net income

attributable to parent company in 9M17 was Rmb1.9bn, up 2006% YoY, and its total capacity

reached 49.5m tonnes. The company’s profitability exceeds most coking coal and PCI coal firms,

and it has a relatively low valuation. The company is expected to benefit from accelerated SOE

reform in Shanxi province, while major shareholders have also shown confidence through stake

increases.

Risks: Downstream demand being lower than expected; coal prices falling more sharply than

expected.

Xishan Coal and Electricity Power (000983 CH)

Leading SOE reform play; coking coal prices likely to edge up Net income attributable to parent

company in 9M17 was Rmb1.374bn, up 577% YoY. The company has advantages in terms of

resources; its operational production capacity reaches ~30m tonnes/year, all for quality coking coal.

Controlling shareholder, Shanxi Coking Coal Group, is the largest coking coal production and

processing company in China with total raw coal production capacity of 181m tonnes/year (including

Dec 20, 2017

4

2018 sector outlook

capacity under construction) and operational capacity of 100m tonnes. As SOE reform in Shanxi

province advances, the company might carry out internal consolidation.

Risks: Coal prices falling by more than expected; capital injections being slower than expected.

Blue Flame Holding (000968 CH)

Leading company in coalbed methane with high growth potential and low valuation Net

income attributable to parent company in 9M17 was Rmb317m, with YoY profit growth turning

positive. In 1H17, coalbed methane production and usage volume were 702m and 535m cubic

meters respectively. Net profit per unit of output and utilization was Rmb0.36/m3 and Rmb0.47/m3.

Going forward, the company is likely to benefit from rapid development of the coalbed methane

industry in Shanxi province and across China. With the increase in new resources and pipeline

construction, the company has relatively large growth potential.

Risks: Coalbed methane prices falling; changes in preferential tax and sales subsidy policies.

Figure 1: Thermal coal’s port prices and mining-area prices fluctuated at high levels during 2017

Figure 2: During 2017, coking coal and anthracite prices fluctuated at high levels; lump coal price rose sharply

Sources: www.sxcoal.com, GF Securities Development & Research Center Sources: www.sxcoal.coml, GF Securities Development & Research Center

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2009 2010 2011 2012 2013 2014 2015 2016 2017

秦港5500平仓价 大同南郊5500坑口价QHD port5500kcal/kg FOB

Datong southern suburbs5500kcal/kg mine mouth

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2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

柳林焦煤 晋城无烟块煤 阳泉无烟末煤 唐山精焦煤Liulincokingcoal

Jinchenganthracite lump

Yangquananthracite slack

Tangshanrefinedcoking coal

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2018 sector outlook

Figure 3：Comparison of global energy consumption structure

2015 energy

consumption

volume

1990-

2015

CAGR

1990 energy structure 2015 energy structure

Coal Crude oil and

gas products

Natural

gas Others Coal

Crude oil

and gas

products

Natural

gas Others

China 2,987,143 5.0% 60.6% 13.9% 1.5% 24.0% 66.6% 18.0% 5.4% 10.0%

U.S. 2,188,279 0.5% 24.0% 39.5% 22.9% 13.6% 17.1% 36.3% 29.5% 17.1%

EU 1,586,366 -0.1% 27.6% 36.9% 18.0% 17.4% 16.6% 32.5% 22.5% 28.4%

India 851,126 4.2% 30.3% 20.0% 3.5% 46.2% 44.5% 24.2% 5.1% 26.2%

Russia 709,731 -0.9% 21.7% 30.0% 41.8% 6.5% 16.4% 22.1% 51.3% 10.2%

Japan 429,786 -0.1% 17.4% 57.1% 10.1% 15.4% 27.3% 43.0% 23.3% 6.4%

Korea 272,691 4.4% 27.3% 53.5% 2.9% 16.2% 29.6% 37.7% 14.4% 18.3%

Others 4,622,156 2.3% 14.7% 42.9% 18.7% 23.6% 11.2% 39.7% 26.7% 22.4%

Global 13,647,278 1.8% 25.3% 36.9% 19.0% 18.9% 28.1% 31.8% 21.6% 18.6%

Sources: IEA, GF Securities Development & Research Center

Figure 4: Demand expected to grow in the US and India; demand growth to become slower in China; growth to remain low in the EU. US supply expected to remain low, EU supply may decline

1990 2016 2017E 2020E 2035E 1990-2016

CAGR

2016-2020E

CAGR 2016-2035 CAGR

Production

China 540 1,686 1,762 1,888 1,842 4.5% 2.9% 0.5%

U.S. 566 365 372 376 278 -1.7% 0.7% -1.4%

EU 375 134 123 110 56 -3.9% -4.8% -4.5%

India 106 289 303 338 580 3.9% 4.0% 3.7%

Indonesia 6 256 269 299 - 15.3% 4.0% -

Australia 115 299 305 315 - 3.8% 1.2% -

Consumption

China 528 1,888 1,944 2,051 1,876 5.0% 2.1% -0.03%

U.S. 483 358 366 382 198 -1.1% 1.6% -3.1%

EU 457 238 241 252 117 -2.5% 1.4% -3.7%

India 110 412 445 515 833 5.2% 5.7% 3.8%

Sources: BP,IEA, GF Securities Development & Research Center

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2018 sector outlook

Figure 5: 2017 China coal consumption reached 3.8bn tonnes, down 4.7% YoY

Figure 6: Coal consumption correlated with GDP growth

Sources: Wind, GF Securities Development & Research Center Sources: Wind, GF Securities Development & Research Center

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2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

消费量:煤炭:中国(亿吨) 同比（右轴）

CAGR=12.67% CAGR=1.98%CAGR=5.89%

Coal consumption (100mtonnes)

YoY (RHS)

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2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

煤炭消费量增速 GDP增速

Coalconsumptiongrowth

GDP growth

Figure 7：According to developed countries’ experience, as GDP growth slows, crude steel production maintains 0-3% growth

Country (Area) Time GDP CAGR Crude steel

production CAGR Time GDP CAGR

Crude steel

production CAGR

EU 2002-2007 2.50% 2.24% 2008-2015 0.50% -2.53%

Japan 1981-1990 4.69% 0.91% 1991-2015 0.68% -0.17%

U.S. 1933-1985 4.48% 2.38% 1986-2015 2.57% 0.22%

Korea 1981-2002 8.23% 7.10% 2003-2015 3.68% 3.46%

Sources: Eurostat, Dabinet Office, BEA, Bank of Korea, World Steel Association, GF Securities Development & Research Center

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2018 sector outlook

Figure 8：Provincial coal capacity reduction plans for the 13th Five-Year Plan period (10k tonnes)

Province

13th Five-Year Plan

2016 2017

Planned capacity

reduction Actual reduction

Planned capacity reduction

Actual reduction

Shanxi 10000 2325 2000 2265

Guizhou 7000 2107 1500 1749

Shandong 6460 1960 351 351

Henan 6254 2388 2000 2012

Inner Mongolia 5414 330 880 660

Hebei 5103 1400 742 796

Shaanxi 4706 2934 - 90

Sichuan 3303 2303 1300 -

Chongqing 3183 2084 - 264

Hunan 3040 2073 - -

Heilongjiang 2477 1010 442 76

Liaoning 2300 1361 - 845

Yunnan 2088 1896 154 169

Jiangxi 1868 1547 153 333

Hubei 1610 1011 - -

Anhui 991 967 705 705

Jiangsu 836 818 18 18

Gansu 800 397 - 240

Fujian 600 297 232 232

Guangxi 520 236 - 246

Beijing 473 180 - -

Jilin 382 1643 314 294

Qinghai 276 9 132 -

Ningxia 122 107 - -

Xinjiang - 274 1160 1163

Military affiliated - 250 50 50

Central SOE 12685 3497 2473 2388

National total (100m tonnes)

8 2.9 1.5 -

Sources: National Energy Administration, www.sxcoal.com, GF Securities Development & Research Center

Dec 20, 2017

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2018 sector outlook

Figure 9：2013-2020 demand and supply balance

2013 2014 2015 2016 17M1-10 2017 2018 2019 2020 Total

Demand 42.4 41.2 39.6 39.3 32.6 39.7 39.9 40.3 40.9

Demand

growth 2.5% -2.9% -3.7% -0.7% 3.7% 1.0% 0.5% 1.0% 1.5%

Supply 42.9 41.6 41.9 36.6 30.7 38.8 39.3 40.2 40.7

Supply

growth 39.7 38.7 36.8 33.6 28.5 36.3 36.8 37.7 38.2

Production

growth 0.8% -2.5% -3.5% -8.7% 4.8% 8.0% 1.4% 2.4% 1.3%

New mines 1.5 4.2 4.5 2 1 1 10

Relaxation

of 276

working

day

restriction

0.8 0.3 1.2 2

Closed

capacity 2.9 0.7 1.5 1.5 1.1 1 8

Net imports 3.2 2.9 2.0 2.4 2.2 2.5 2.5 2.5 2.5

Spare

capacity 3.1 0.6

Supply

shortage -0.5 -0.4 -2.3 2.7 1.9 0.9 0.6 0.1 0.2

Sources: NBS, China National Coal Association, General Administration of Customs， GF Securities Development & Research Center

Figure 10: 2018 long-term contracts expected to reach 2bn tonnes, accounting for 53% of total consumption

Sources: www.sxcoal.com, GF Securities Development & Research Center

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长协合同量（亿吨） 长协合同量占总消费量比例Long-term contracts(100m tonnes)

Long-term contracts as% of total consumption

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2018 sector outlook

Figure 11: Sector pre-tax profit reached Rmb250.6bn in 10M17, returning to the level seen in 2012-2013

Sources: NBS, GF Securities Development & Research Center

Figure 12：Net profit per tonne of coal in 2003-2017

Year Pre-tax profit

（Rmb 10k）

Raw coal production

（10k tonnes）

NP per tonne

（Rmb）

QHD port thermal coal FOB price

（Shanxi premium blend 5,500kcal/kg,

Rmb/tonne） 2003 138 18.4 6 264

2004 307 21.2 11 361

2005 552 23.5 18 426

2006 677 25.3 20 427

2007 872 20.9 31 467

2008 2000 23.9 63 724

2009 1827 27.1 51 600

2010 2930 30.8 71 746

2011 4342 35.2 93 819

2012 3555 36.5 73 707

2013 2370 36.8 48 588

2014 1268 38.7 25 518

2015 441 36.8 9 414

2016 1091 33.6 24 469

2017M3 271 3.0 68 655

2017M4 280 2.9 71 674

2017M5 245 3.0 62 594

2017M6 241 3.1 59 563

2017M7 239 2.9 61 610

2017M8 287 2.9 74 625

2017M9 261 3.0 66 651

2017M10 245 2.8 65 716

2017M1-10 2506 28.5 66 628

Sources: Wind, NBS, GF Securities Development & Research Center Note: 2007-2011 pre-tax profit and crude coal production are 11M cumulative values.

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利润总额:累计值（亿元） 净利率（右轴）Pre-tax profit YTD(Rmb 100m)

Net profit margin

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2018 sector outlook

Figure 13: Debt-to-asset ratio was 68.24% at the end of Oct 2017, down 0.13% from end-2016

Sources: NBS, GF Securities Development & Research Center

Figure 14：Debt-to-asset ratio for major companies in 2010- 2017

Company Code 10 A 11A 12A 13A 14A 15A 16A 10-16 Avg

17Q1 17Q2 17Q3

Thermal coal

Huolinhe Opencut Coal Industry

002128 CH 48% 40% 37% 36% 39% 37% 32% 38% 30% 32% 27%

Yanzhou Coal Mining 600188 CH 49% 56% 60% 66% 67% 69% 65% 62% 63% 62% 60%

Shanghai Datun Energy Resources

600508 CH 30% 27% 26% 36% 39% 38% 36% 33% 35% 34% 34%

Shanxi Coal International Energy

600546 CH 78% 68% 76% 77% 81% 87% 83% 79% 83% 82% 81%

Anhui Hengyuan Coal Industry and Electricity

Power 600971 CH 53% 50% 48% 47% 49% 56% 57% 52% 56% 54% 50%

Datong Coal Industry 601001 CH 26% 26% 35% 46% 50% 63% 62% 44% 62% 60% 58%

Shaanxi Coal Industry 601225 CH 50% 48% 53% 51% 52% 57% 52% 52% 51% 47% 45%

China Coal Energy 601898 CH 29% 40% 45% 52% 58% 61% 58% 49% 57% 57% 57%

China Coal Xinji Energy 601918 CH 63% 65% 65% 68% 76% 85% 84% 72% 83% 83% 83%

Coking coal

Jizhong Energy Resources 000937 CH 51% 57% 55% 56% 50% 51% 54% 53% 53% 53% 55%

Shanxi Xishan Coal & Electricity Power

000983 CH 51% 57% 61% 59% 61% 64% 64% 60% 64% 64% 63%

Guizhou Panjiang Refined Coal

600395 CH 23% 39% 41% 45% 42% 42% 44% 39% 43% 46% 42%

Kailuan Energy Chemical 600997 CH 56% 58% 59% 57% 59% 60% 57% 58% 53% 53% 53%

Pingdingshan Tianan Coal Mining

601666 CH 47% 44% 44% 54% 61% 72% 70% 56% 69% 69% 67%

Shanxi Lu'an Environmental Energy Development

601699 CH 57% 55% 58% 62% 64% 65% 69% 61% 68% 68% 68%

Anthracite

Shanxi Lanhua Sci-Tech Venture

600123 CH 48% 43% 49% 49% 53% 54% 61% 51% 61% 60% 63%

Yang Quan Coal Industry 600348 CH 55% 54% 54% 48% 55% 60% 66% 56% 65% 62% 61%

Beijing Haohua Energy Resource

601101 CH 25% 28% 26% 34% 41% 45% 46% 35% 45% 44% 43%

Simple avg 46% 47% 49% 51% 54% 58% 58% 52% 56% 56% 55% Sources: Wind, GF Securities Development & Research Center

50%

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75%

Dec 20, 2017

11

2018 sector outlook

Figure 15：Capex for major listed companies in 2010-9M17 (Rmb 100m)

Company Code 2010 2011 2012 2013 2014 2015 2016 16Q1-3 17Q1-3 YoY

Thermal coal

Huolinhe Opencut Coal Industry

002128 CH 8.5 6.8 6.3 6.3 7.3 5.5 3.3 1.7 1.3 -22.8%

Yanzhou Coal Mining 600188 CH 48.0 109.5 69.1 90.9 54.8 65.7 72.2 49.2 42.1 -14.5%

Shanghai Datun Energy Resources

600508 CH 13.8 11.2 16.3 16.9 11.0 9.6 8.4 4.0 7.1 80.5%

Shanxi Coal International Energy

600546 CH 13.1 17.0 35.0 24.5 11.5 8.1 3.6 1.5 2.7 81.6%

Anhui Hengyuan Coal Industry and Electricity

Power

600971 CH 7.5 18.7 11.8 8.0 5.8 5.3 1.0 1.3 2.3 76.2%

Datong Coal Industry 601001 CH 17.5 22.8 18.2 19.6 19.5 12.1 9.5 7.8 9.4 20.7%

Shaanxi Coal Industry 601225 CH 69.4 90.8 69.0 65.5 26.8 24.3 20.1 13.5 14.3 5.5%

China Coal Energy 601898 CH 122.6 200.7 271.8 252.4 195.2 113.7 75.4 45.6 56.7 24.4%

China Coal Xinji Energy 601918 CH 26.6 26.9 22.7 15.7 17.3 29.0 11.9 10.6 4.3 -58.9%

Coking coal

Jizhong Energy Resources

000937 CH 36.5 31.5 32.4 31.4 28.7 19.1 10.5 5.4 5.2 -3.9%

Shanxi Xishan Coal & Electricity Power

000983 CH 23.1 30.2 32.0 16.5 17.0 22.7 26.0 15.2 16.9 11.3%

Guizhou Panjiang Refined Coal

600395 CH 3.7 9.5 10.1 7.6 2.9 3.1 2.1 1.4 2.1 54.0%

Kailuan Energy Chemical 600997 CH 10.6 17.5 22.2 18.8 15.6 6.4 1.2 0.6 2.9 348.0%

Pingdingshan Tianan Coal Mining

601666 CH 25.6 18.8 4.8 3.4 2.4 11.1 13.2 13.1 13.1 0.0%

Shanxi Lu'an Environmental Energy

Development

601699 CH 45.5 42.3 47.7 36.4 28.2 18.7 8.7 17.8 12.6 -29.3%

Anthracite

Shanxi Lanhua Sci-Tech Venture

600123 CH 4.6 6.8 11.4 12.0 12.7 6.5 8.3 3.8 7.1 83.6%

Yang Quan Coal Industry 600348 CH 6.7 15.8 26.7 32.0 37.6 29.6 31.8 7.9 5.9 -25.5%

Beijing Haohua Energy Resource

601101 CH 9.4 5.7 15.0 13.2 12.7 6.7 2.8 2.0 3.1 56.1%

Simple avg 40.4 59.6 66.0 62.4 49.8 36.3 31.3 17.7 18.4 4.0%

Sources: Wind, GF Securities Development & Research Center

Dec 20, 2017

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2018 sector outlook

Figure 17：Domestic coking coal demand and supply balance

10k tonnes 2015 2016 2017E 2018E 2019E 2020E

Raw coal production 374700 336400 355000 367000 373000 384000

Growth -10.2% 5.5% 3.4% 1.6% 2.9%

Proportion of raw coking

coal 33% 33% 33% 32% 32% 32%

Raw coking coal production 122000 109530 112268 113952 115319 115896

Growth -10.2% 2.5% 1.5% 1.2% 0.5%

Percentage of refined coal

output 39.6% 39.6% 40.0% 40.0% 40.0% 40.0%

Refined coking coal

production 48323 43575 44907 45581 46128 46358

Growth -9.8% 3.1% 1.5% 1.2% 0.5%

Net import 4666 5803 5500 5200 5000 5000

Growth 24.4% -5.2% -5.5% -3.8% 0.0%

Total supply 52988 49378 50407 50781 51128 51358

Growth -6.8% 2.1% 0.7% 0.7% 0.5%

Total demand 52775 53391 52590 51801 52060 52321

Growth 1.2% -1.5% -1.5% 0.5% 0.5%

Supply-demand gap -213 4013 2183 1020 933 962

Sources: Wind, GF Securities Development & Research Center

Figure 16：Domestic thermal coal demand and supply balance

100m tonnes 2015 2016 2017E 2018E 2019E 2020E

Thermal coal production

30.27 27.54 29.74 31.23 32.64 33.94

Growth -9.01% 8.00% 5.00% 4.50% 4.00%

Net import 1.08 1.24 1.30 1.20 1.20 1.20

Growth 15.0% 5.0% -7.9% 0.0% 0.0%

Total supply 31.35 28.78 31.05 32.43 33.84 35.14

Growth -8.2% 7.9% 4.5% 4.3% 3.9%

Demand 31.30 31.09 32.33 32.98 33.64 34.31

Growth -0.7% 4.0% 2.0% 2.0% 2.0%

Supply-demand gap

0.05 -2.30 -1.28 -0.54 0.20 0.83

Sources: BP, Wind, General Administration of Customs, GF Securities Development & Research Center

Dec 20, 2017

13

2018 sector outlook

Figure 18：Domestic CBM 13th Five-Year Plan goals

Growth metrics 2015 2020 CAGR

New proven geological reserves（100m m3） 3504 4200 3.7%

Ground CBM production（100m m3） 44 100 17.8%

Ground CBM utilization（100m m3） 38 90 18.8%

Ground CBM utilization rate（%） 86.4 90 +3.6pp

Underground coal mine gas extraction volume（100m m3） 136 140 0.58%

Underground coal mine gas utilization（100m m3） 48 70 7.8%

Underground coal mine gas utilization rate（%） 35.3 50 +14.7pp

Sources: 13th Five-Year Plan, GF Securities Development & Research Center

Figure 19: Natural gas production in 10M17 reached 121.1bn m3, up 9.7% YoY

Figure 20: Natural gas consumption in 9M17 reached 173.5bn m3 , up 13.4% YoY

Sources: NBS, GF Securities Development & Research Center Sources: NBS, GF Securities Development & Research Center

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Dec 20, 2017

14

2018 sector outlook

Figure 21: Natural gas import in 9M17 reached 67.4bn m3 , up 22.3% YoY

Figure 22: LNG price in China rose sharply towards the end of Nov

Sources: General Administration of Customs, GF Securities Development & Research Center

Sources: NBS, GF Securities Development & Research Center

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全国LNG市场价（元/吨）Nationwide LNG marketprice (Rmb/tonne)

Dec 20, 2017

15

2018 sector outlook

Figure 23：Company financials, dividend payouts and valuations

16A NP (Rmb 100m)

17Q1-Q3 NP

17Q1-Q3 recurring

NP

Current dividend

yield 17E NP 18E NP 17E-PE 18E-PE

Thermal coal

600188 CH Yanzhou Coal Mining 20.65 47.83 43.91 0.9% 69.1 76.4 9.3 8.4

601898 CH China Coal Energy 20.27 24.32 22.53 0.7% 32.5 49.7 23.9 15.6

601225 CH Shaanxi Coal Industry 27.55 80.68 80.63 1.4% 105.4 110.8 7.6 7.2

600546 CH Shanxi Coal International Energy 3.08 1.85 2.26 1.8 4.5 53.8 21.3

000683 CH Inner Mongolia Yuan Xing Energy -5.13 5.03 4.98 6.9 8.2 17.3 14.5

601001 CH Datong Coal Industry 1.86 6.55 1.32 7.2 2.4 13.9 41.9

002128 CH Huolinhe Opencut Coal Industry 8.24 12.00 12.06 2.8% 17.0 20.0 10.1 8.6

601918 CH China Coal Xinji Energy 2.42 1.70 2.64 2.5 3.1 39.4 32.1

600403 CH *ST Henan DaYou Energy -19.63 4.14 3.92 - - - -

600971 CH

Anhui Hengyuan Coal Industry and Electricity Power

0.35 9.52 9.48 11.4 12.7 8.9 8.0

600508 CH Shanghai Datun Energy Resources 4.52 6.22 6.03 0.8% 7.8 8.9 11.2 9.8

600121 CH *ST Zhengzhou Coal Industry & Electric Power

-6.30 6.15 5.73 7.1 5.1 8.4 11.8

000552 CH

Gansu Jingyuan Coal Industry and Electricity Power

2.22 3.71 3.72 0.6% 5.9 5.9 13.7 13.6

600397 CH Anyuan Coal Industry -20.56 -1.01 -0.68 - - - -

000780 CH

*ST Inner Mongolia Pingzhuang Energy

-3.24 2.32 2.33 3.2 3.9 15.3 12.9

Coking coal

000983 CH

Shanxi Xishan Coal & Electricity Power

4.34 13.74 13.11 0.1% 18.6 20.7 15.7 14.1

600157 CH Wintime Energy 6.69 4.12 3.91 0.3% - - - -

601666 CH Pingdingshan Tianan Coal Mining 7.53 10.27 9.90 12.3 11.7 11.3 11.9

000937 CH Jizhong Energy Resources 2.44 8.41 9.02 1.8% 11.1 11.4 18.1 17.6

601699 CH

Shanxi Lu'an Environmental Energy Development

8.57 19.01 19.05 0.9% 28.4 35.2 10.7 8.7

600997 CH Kailuan Energy Chemical 4.32 3.27 3.34 1.7% 6.8 6.6 13.7 14.1

600395 CH Guizhou Panjiang Refined Coal 1.96 6.44 6.07 3.6% 9.1 10.0 12.0 11.0

Anthracite

600348 CH Yang Quan Coal Industry 4.29 11.61 11.96 14.7 15.7 11.5 10.8

000933 CH Henan Shenhuo Coal & Power 3.42 8.89 7.89 0.3% 13.2 16.1 12.4 10.2

600123 CH Shanxi Lanhua Sci-Tech Venture -6.60 7.42 7.30 9.6 10.1 10.1 9.6

601101 CH Beijing Haohua Energy Resource -0.08 6.29 5.96 - - - -

Others

600180 CH CCS Supply Chain Management 5.31 3.54 1.82 0.5% 6.7 8.2 15.5 12.7

600093 CH

Easysight Supply Chain Management

6.03 6.13 6.14 2.5% 8.4 9.9 14.3 12.1

600740 CH Shanxi Coking 0.44 0.52 0.53 0.7 0.8 103.6 87.4

000968 CH Shanxi Blue Flame Holding 3.84 3.17 3.14 6.0 7.6 24.0 19.1

Sources: Wind, Company data, GF Securities Development & Research Center Note*：Current dividend yield = 2016 dividend per share/Share price on 2017 Dec 8

Dec 20, 2017

16

2018 sector outlook

Rating definitions Benchmark: Hong Kong Hang Seng Index Time horizon: 12 months

Company ratings

Buy Stock expected to outperform benchmark by more than 15%

Accumulate Stock expected to outperform benchmark by more than 5% but not more than 15%

Hold Expected stock relative performance ranges between -5% and 5%

Underperform Stock expected to underperform benchmark by more than 5%

Sector ratings

Positive Sector expected to outperform benchmark by more than 10%

Neutral Expected sector relative performance ranges between -10% and 10%

Cautious Sector expected to underperform benchmark by more than 10%

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