Yanzhou Coal Mining Co. Ltd. Upgraded To #BB# On Improving Financial P Outlook Stable

Stocks and Financial Services Press Releases Thursday April 26, 2018 17:05
HONG KONG--26 Apr--S&P Global Ratings

HONG KONG (S&P Global Ratings) April 26, 2018--S&P Global Ratings raised its long-term issuer credit rating on Yanzhou Coal Mining Co. Ltd. to 'BB' from 'BB-'. The outlook is stable. At the same time, we raised our long-term issue rating on the US$550 million senior unsecured notes the company guarantees to 'BB' from 'BB-'. We also raised the rating on the China-based coal producer's guaranteed US$500 million senior unsecured perpetual securities to 'BB-' from 'B+'.

We upgraded Yanzhou Coal after the company reported financial results for 2017 that beat our expectations, mainly because of higher-than-expected coal prices. We expect the company's financial metrics to remain largely steady in the next two to three years on increasing sales volume and declining capital expenditure due to its reduced appetite for expansion.

China's coal prices recovered significantly in 2017 amid tightening supply resulting from state-guided efforts to reduce industry capacity. We believe this "supply-side" reform will continue in 2018, with the Chinese government targeting to close another 150 million tons of coal-mine capacity or around 3% of China's total capacity. We expect new capacity from coal mines classified as "advanced" by the government (on safety and efficiency measures) to be gradually launched from 2018 onwards. At the same time, China's energy mix will likely continue to shift toward non-fossil fuel sources. Therefore, we think coal prices are likely to moderately decline in the next one to two years.

We estimate Yanzhou Coal will see significant volume growth in 2018, with its latest Australian acquisition, Coal & Allied Industries Ltd., being consolidated for the full year and the ramp-ups of its Inner Mongolia mines and Moolarben (Australia). We also expect Yanzhou Coal to be less acquisitive and its capital expenditure to trend down. The company's planned share placement in China's domestic market should also help to strengthen its balance sheet, though we have not factored this into our base case since the transaction has not yet received regulatory approval.

Meanwhile, the parent company's credit profile has improved. Yankuang Group Co. Ltd.'s financial leverage materially contracted during the past year on improving profit. The company also made good progress in selling off loss-making chemicals subsidiaries.

Yankuang Group is the controlling shareholder of Yanzhou Coal with a shareholding of 50.4%. We continue to view Yanzhou Coal as a core subsidiary of Yankuang Group, with the former accounting for a significant portion of the latter's profit and assets. We believe Yanzhou Coal will receive strong and long-term commitments of support from Yankuang Group.

The stable outlook reflects our view that industry reforms will continue to support a more balanced demand and supply dynamic in the Chinese coal market. Though new capacity additions and a shifting energy-consumption mix may lead to moderate coal price declines in the next 12 months, we still expect Yanzhou Coal's financial performance to remain steady. The potential price decline will be partially offset by increasing sales volume. We believe Yanzhou Coal's likelihood of receiving extraordinary government support will remain unchanged in the next 12-24 months. At the same time, we continue to view Yanzhou Coal as a core subsidiary of Yankuang Group and the company's rating will be highly dependent on the credit profile of Yankuang Group.

We could lower the ratings on Yanzhou Coal if Yankuang Group's financial leverage is much higher than our expectation for a sustained period. This could happen due to significant coal price declines and hence lower-than-expected cash flows at both Yanzhou Coal and Yankuang Group. This may also happen due to capital spending overruns on increasing appetite for organic expansion or acquisitions. We could also lower the ratings if there is weakened likelihood of extraordinary government support for Yankuang Group, which we view unlikely in near term.

We may upgrade Yanzhou Coal if both the company and Yankuang Group's financial metrics improve materially due to stronger than expected coal prices or lower capital spending. An indication of such improvement is that Yankuang Group's debt-to-EBITDA ratio approaches 5.0x for an extended period.


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