January 20, 2014

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SEE PAGE 12 FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS

  China Shenhua Energy (1088 HK) 

Lowering EPS and target price We reduce our FY13-15F EPS by 6-8% due to a higher tax

rate and minority interest expense, as well as lower coalprice assumptions for 2014 and 2015.

We lower TP 14% to HKD25 on a 20% discount to our DCFvalue, equal to 1.2x PBR (ROE 14% avg. 2014/15) vs. the previous 10% discount and 1.4x PBR (ROE avg. 15.5%).

Maintain BUY as cash generation remains strong and EBITDAincreasing YoY through 2015. The company acquired BaotouChemicals and further M&A upside is likely.

What’s Changed? The major hit to our EPS forecasts is a higher tax rate (20% vs. 19%previously), and minority interest expense (18% of PBT vs. 13%previously) reflecting Shenhua’s changing profit mix. We also lower our coal price assumptions due to the soft market dynamics.

A rising share of Shenhua’s profit is coming from power generation and logistics (rail/shipping) largely in eastern China where taxrates are higher, and less of a share from coal located in western China where tax rates are lower. The logistics business, particularlyrail, has a significantly higher minority interest share.

We also lower our coal price assumption by 4% for 2014 to reflect the 1Q14 contract price settlements and our forecast of a further5% decrease in spot prices from now until the end of June onweakening seasonal demand amid above-normal power plant inventory at 22 days. We also revise down our 2015 coal price forecast by 3% to reflect the lower base in 2014.

Strong CF, dividend and valuation support BUY rating Shenhua has strong cash generation, 3% EBITDA growth pa and 5%dividend yield. The 20% discount to our DCF valuation reflects theweak EPS trend, the challenging outlook for thermal coal and lower ROE. Our estimates include recently acquired BaotouChemical and we see further M&A as likely.

  Key Data

 

Share Price Performance

 

 

Maybank vs. Market

 

Share Price: HKD21.70 MCap (USD): 55.7B Hong Kong

Target Price: HKD25.00(+15%) ADTV (USD): 52M Materials (New)BUY

52w high/low (HKD)

Free float (%)

Issued shares (m)

Market capitalization

Major shareholders:

-Walter Scott & Partners Ltd. 5%

-BlackRock Fund Advisors 4%

-The Vanguard Group, Inc. 3%

33.50/18.22

19,890

27.0

HKD431.6B

18,00019,00020,00021,00022,00023,00024,00025,00026,00027,00028,000

18.020.022.024.026.028.030.032.034.036.038.0

Oct-11 Apr-12 Oct-12 Apr-13 Oct-13

China Shenhua Energy (L)

Hang Seng Index (R)

1 Mth 3 Mth 12 Mth

Absolute(%) (10.3) (11.1) (32.8)

Relative to country (%) (10.0) (10.6) (31.8)

Positive Neutral Negative

Market Recs 40 6 5

Maybank Consensus % +/-

Target Price (HKD) 25.00 26.27 (4.8)

2013 PATMI(CNYm) 43,776 43,678 0.2

2014 PATMI(CNYm) 43,011 43,729 (1.6)

Source: FactSet; Maybank

FYE Dec (CNY m) FY11A FY12A FY13E FY14E FY15ESales 209,225.0 250,260.0 264,526.0 279,905.7 297,799.7EBITDA 84,531.0 87,754.0 87,810.3 90,957.0 93,604.0Core net profit 45,846.0 48,858.0 43,776.4 43,011.3 44,826.3Core EPS (CNY) 2.31 2.46 2.20 2.16 2.25Core EPS growth (%) 18.1 6.6 (10.4) (1.7) 4.2Net DPS (CNY) 0.90 0.96 0.86 0.84 0.88Core P/E (x) 7.4 6.9 7.7 7.8 7.5P/BV (x) 1.5 1.3 1.2 1.1 1.0Net dividend yield (%) 5.3 5.7 5.1 5.0 5.2ROAE (%) 18.1 17.0 13.5 12.1 11.6ROAA (%) 11.8 11.3 9.0 8.2 8.1EV/EBITDA (x) 6.9 6.9 4.8 4.5 4.1Net debt/equity (%) 0.1 6.3 9.5 3.7 nm

Alexander Latzer(852) 2268-0647alexanderlatzer@kimeng.com.hk

(Unchanged)

 

January 20, 2014 2

 

China Shenhua Energy

Key catalysts – mostly all negative near term The upcoming set of newsflow on Shenhua, expected by the end of March, should be mostly negative as we expect: 1) weaker spot market coal prices; 2) lower QoQ 2Q14 coal contract price; and 3) lower HoH 2H13 results. Shenhua’s earnings are typically lower during 2H than 1H due mainly to higher SG&A expense booked later in the year.

The lower contract price follows our estimate of a 5% decrease in the spot market from the current price of CNY620/t by the end of June 2014. Shenhua settled its 1Q14 contract coal price for domestic power groups at CNY580-590/t. The table below contains our assumptions for key financial and operating items and how they compare to our previous forecasts.

Figure 1: Revisions to our key estimates and assumptions New Old % Chg. 2013 2014 2015 2013 2014 2015 2013 2014 2015 EPS (CNY) 2.20 2.16 2.25 2.33 2.36 2.42 -5.6 -8.4 -7.0 Net profit (CNY bn) 43.8 43.0 44.8 46.4 47.0 48.2 -5.6 -8.5 -7.0 Tax rate (%) 19.1 20.0 20.0 18.4 18.7 19.8 0.7 bps 1.3 bps 0.2 bps Minority interest (CNY bn) 10.3 12.5 13.0 8.9 9.0 9.3 15.9 39.4 39.7 China coal price (CNY/t)* 617.1 616.9 629.3 614.5 644.5 650.3 0.4 -4.3 -3.2 China coal price (US$/t)* 100.3 101.1 104.9 99.7 105.6 108.4 0.6 -4.3 -3.2 Total coal cost (CNY/t)* 218.8 224.2 226.2 217.0 221.6 223.6 0.8 1.2 1.2 Total coal cost (USD/t) 35.6 36.8 37.7 35.2 36.3 37.3 1.0 1.2 1.2 Coal production (mn t) 315.6 326.3 337.5 315.6 326.3 337.5 0.0 0.0 0.0 Coal sales volume (mn t)* 500.0 522.1 550.1 490.0 522.1 550.1 2.0 0.0 0.0 Source: **Qinhuangdao China 5,800 kcal thermal coal. Coal sales volume includes coal production and third party coal purchases. Total coal cost includes cost of self-produced coal, external purchases, and transportation.

Long-term positive outlook for cash flow growth We have left our coal production and sales volume forecasts unchanged but we lower our net profit and ROE estimates as mentioned above. We assume approximately 3% annual growth in annual coal production and 5% in coal sales (including third-party coal purchases). Shenhua will provide FY14 volume guidance during its FY13 results briefing.

The lower ROE is a function of the changing business mix from high-margin coal sales from self-owned mines to increasing sales from third parties, as well as higher profits from the power and logistics segments. In addition, we forecast low single digit increases in unit coal costs amid flat coal prices YoY in 2014 and a 2% increase in 2015.

Figure 2: ROE, net profit and coal volumes actual and forecast

Source: Company data, Maybank Kim Eng estimates.

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China and regional thermal coal prices*

Source: McCloskey; Maybank Kim Eng forecast. *Prices are high CV thermal coal (FOB basis 5,800 kcal for Qinhuangdao, China and 6,000 kcal for Newcastle, Australia).

We have left our coal production and sales forecasts unchanged for 2014 until a further update is provided in March at the company’s annual review. Shenhua’s monthly updates have tracked well with our 2013 volume forecast. The changing business mix downstream from coal has led to downwards pressure on profit margins. In addition, the tax rate and minority interest share are higher in these businesses.

 

January 20, 2014 3

 

China Shenhua Energy

Despite the flat profit outlook over the next two years, Shenhua’s cash flows remain strong. The company has significantly stepped up capital spending the past few years, particularly on the power and logistics segments. We forecast decreasing CAPEX spending and increasing free cash flows ahead.

We see FCF supporting healthy dividends (about 40% pay-out ratio) as well as M&A led growth as Shenhua seeks to diversify into new geographies and new, but related businesses. Thus far the diversification has been modest relative to its existing businesses.

Figure 3: Free cash flow outlook

Source: Company data, Maybank Kim Eng estimates.

Corporate Strategy to augment a strong core Shenhua’s core strengths remain its fully integrated business model from coal mining through railway transportation, ports, and shipping, with rapid growth in coal-fired power plants largely supplied with internal coal. It continues to invest in its core businesses, and has taken modest steps at asset and geographical diversification.

Starting in 2011, spending on the core business shifted from a majority share in coal to that for the power and logistics businesses. We think this has been the best strategy for the company in light of the current weak market and the difficulty in executing acquisitions in China and the coal industry. It is consolidating coal supply through its logistics network rather than aggressively expanding its own coal mines, which would only add to supply in a weak market.

However, we believe that it would be ideal for Shenhua to acquire quality coal assets thereby maintaining a high profit margin rather than increasing its sales of third party coals at a low profit margin. What acquisitions it has made have been modest into new, but related businesses. We don’t see the acquisitions as significant enough thus far to return the company to a more rapid earnings growth rate alone, absent a better coal price outlook.

Recent CAPEX growth in the transportation segment has allowed the company to continue to increase coal sales from third parties, which are now nearly 40% of total coal sales, up from 15% in 2009. Most recently in late 2013, Shenhua signed an agreement to expand its railway network to include transporting coal from Mongolia’s Tavan Tolgoi basin (mainly semi-soft coking coal) through China to domestic customers and to eastern Chinese ports for export. The realization of such a plan will depend upon further positive momentum from the Mongolian and Chinese governments.

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CNYb CAPEX Dividends Operating cash flows Free Cash Flows

Despite the shift to more logistics CAPEX, Shenhua’s core business remains strong and M&A has been conservative, thus far not altering the main drivers of its overall business. But we think there are risks to diluting down the returns of the core business by continuously increasing third party coal sales at a higher rate than self-owned coal production.

Shenhua remains highly cash generative and when CAPEX spending slows there will be increasing discretionary cash flow for M&A and to maintain a high dividend payout of about 40%.

Ideally, Shenhua should be acquiring high quality coal assets rather than simply leveraging its transport infrastructure for the coal of other producers. Acquiring and consolidating coal assets and production would support profit margins compared to the dilutive impact of paying the market price for third party coal in northwest China and reselling it at the port in eastern China.

 

January 20, 2014 4

 

China Shenhua Energy

Shenhua’s fully integrated business model has provided operating flexibility, which has helped it maintain industry low average unit coal costs. We see it likely that railway cargo rates will increase in the future to help fund the heavy debt burden and reduce losses at the state owned railway company. With its own railway line, Shenhua would benefit from rising coal prices that included higher transport costs for coal delivered on the public railways as its own costs would be unaffected.

At the end of 2013, Shenhua acquired a 100% interest in Baotou Coal Chemical and Jiujiang Power from its parent co. Baotou is principally engaged in the coal-based chemical processing business. The businesses were acquired for CNY9.32bn (USD1.5bn) based on an independent appraisal of the businesses and direct negotiations between Shenhua and its SOE parent. The majority of the valuation is attributed to Baotou Chemical equal to CNY9.27bn, with Jiujiang Power only CNY50mn. The purchase was paid out of the cash balances of Shenhua. We have added the businesses to our Shenhua estimates as of the beginning of 2014.

Baotou Chemical’s total assets were CNY13.5bn, total liabilities CNY8.3bn, and net assets Rmb5.1bn as of the end of September, 2013. The assets account for slightly less than 3% of Shenhua’s total assets as of June 30, 2013. Total revenues were CNY4.4bn for the nine month period of 2013, equal to about 2% of Shenhua’s revenues on a comparable period basis. After tax net profit was CNY714mn for the same nine month period, also equal to approximately 2% of Shenhua’s profit. Jiujiang Power’s total assets were CNY80.5mn and net assets CNY49.6mn as of the end of September, 2013. The company lost CNY0.391mn during the nine months of 2013.

One interesting example of modest asset diversification is the formation of a U.S. subsidiary (Shenhua Energy Inc.) for the development of 25 shale gas wells in Greene Country, Pennsylvania with Energy Corporation of America (ECA). China Shenhua will contribute USD90m to its wholly-owned subsidiary China Shenhua Overseas Development & Investment Co., Ltd to finance Shenhua Energy Inc., which will act as the investment entity for the joint-venture.

ECA was established in 1963 as a private enterprise and is domiciled in West Virginia, with offices in Charleston. The company is engaged in the exploration, extraction, production, and transportation of natural gas and petroleum in the U.S. and worldwide. ECA’s total assets were USD914mn at year-end 2012, and revenues and net profit for the same year were USD345m and USD75m, respectively.

The total investment amount for the shale gas project is estimated at USD146m, of which the Overseas Company will contribute USD90m through Shenhua Energy and the remaining portion will be shared 50/50 by the overseas company and ECA. The target is shale gases consisting of methane at a depth of approximately 7,850-8.250 feet. The recoverable gas reserve is estimated at 134 billion cubic feet (3.8bn cubic metres) for the first 30 years.

We see it likely that railway cargo rates will increase in the future to help fund the heavy debt burden and reduce losses at the state owned railway company. With its own railway line, Shenhua would benefit from rising coal prices that included higher transport costs for coal delivered on the public railways as its own costs would be unaffected.

Batou Chemical should be accretive by about 2% to EPS starting from 2014. However, we have a hard time seeing the long-term rationale for a business where costs are high to convert coal and one that is based on scarce water resources. We reserve judgement on the shale gas exploration initiative, which may simply end up as a learning experience in the method of extraction and development.

 

January 20, 2014 5

 

China Shenhua Energy

Coal supply and demand growth slowing ahead The thermal coal market continues to struggle with slowing demand growth and ample supply. Coal prices still outperformed our estimate of a 5% increase from the end of September to year-end by rising about 15% over the period from CNY570/t to CNY657/t (basis Qinhuangdao 5,800 kcal/t). But the price promptly fell 7% over the first two weeks of this year after Shenhua priced 1Q14 contracts at a discount to quoted market prices, which appeared to misrepresent actual market clearing prices.

Total power demand growth appears to be easing to a more sustainable 7-9% per annum growth, with the portion attributed to thermal power plants still high at 10-12%, but is likely to slow further to lower than the total power demand growth rate in the longer-term. Inventory at power plants measured in days is above normal at 22 compared to prior periods (see margin graphs). We believe coal inventory is sufficient for the high winter demand period and expect coal demand to slacken until the summer. This is reflected in our forecast 5% decrease in coal prices from now until the end of June.

Efforts to consolidate the coal supply in China have been redoubled in light of the oversupply of coal in the market and low prices. Recent news articles indicated a private coal miner in Shanxi Province may default on its issuance of a USD500m trust-loan product distributed through ICBC. Coal production growth turned negative during 1H13 but has since returned to low single-digit growth (see graph below). The table in the margin indicates a significant decrease in coal production in Inner Mongolia and a slower rate of growth in Shanxi. The data indicates a rebound in production on a monthly basis from low levels earlier this year, perhaps due to the rise in coal prices later in the year.

Figure 4: China total raw coal production and YoY growth and trend line

Source: CCTD, McCloskey.

Our forecast for the aggregate coal market in China is contained in the table below showing our estimates of consumption, trade, and inventory. We forecast thermal coal demand growth to fall in half over the ensuing eight years through 2020 to about 100 million tonnes/yr. compared to the prior period from 2004-2012. The main drivers of the reduction in coal demand are slowing thermal power plant build rates due to measures to reduce pollution (move to green energy), and lower energy intensity due to slowing industrial demand growth. Competing energy sources are hydro, nuclear, wind, and gas. We forecast that the share of total power generation from thermal power will remain high, but decrease from about 70% in 2012 to about 60% in 2020.

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Source: China NBS.

China’s coal inventory (measured in days)

Source: CCTD, McCloskey, Maybank Kim Eng estimates.

Key China provinces coal output Nov 13 YTD 13

Inner Mongolia 113.3 903.5 YoY chg. 9% -10% Shanxi 78.8 859.6 YoY chg. 8% 4% Shaanxi 47.0 445.2 YoY chg. 7% 7% SUB TOTAL 239.1 2,208.3 YoY chg. 8% -1% % share of total China 72% 66% Other Provinces 90.9 1,115.7 YoY chg. -8% -4% TOTAL CHINA 330.0 3,324.0 YoY chg. 3% -2%

Source: NBS, McCloskey, Maybank Kim Eng.

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January 20, 2014 6

 

China Shenhua Energy

Figure 5: Total raw coal supply and demand model (million tonnes) 2013 2014 2015 2013 2014 2015 2013 2014 2015 Production 3,050 3,240 3,519 3,660 3,630 3,739 3,838 3,940 4,038 Incremental Prod 334 190 279 141 -30 109 99 102 98 Incremental Prod (%) 12.3% 6.2% 8.6% 4.0% -0.8% 3.0% 2.7% 2.7% 2.5% Export 22 18 15 9 7 5 4 3 3 Import 125 165 183 289 322 338 350 357 364 Net Export (Import) -102 -147 -169 -280 -315 -333 -346 -354 -361 Net Export growth (%) -1958% 43% 15% 66% 13% 6% 4% 2% 2% Inventory (total EOY) 172 223 313 347 288 257 235 219 208 Inventory change -17 51 91 34 -59 -32 -22 -16 -11 Days of supply (total inv.) 20 24 32 32 26 23 20 19 17 Domestic Consumption 3,169 3,336 3,597 3,906 4,004 4,104 4,206 4,309 4,411 Incremental Cons (Mt) 497 166 262 309 98 100 103 103 101 Incremental Cons (%) 18.6% 5.3% 7.8% 8.6% 2.5% 2.5% 2.5% 2.4% 2.4% Source: CCTD, Bloomberg, McCloskey, Steelhome, Maybank Kim Eng estimates. Note that in the table below, coking coal production accounted for about 20% of total raw coal production during 2012.

Valuation Our HKD25 target price is based on a 20% discount to our DCF valuation of HKD31/sh, revised down from a previous 10% discount and a DCF of HKD32/sh. The larger discount reflects the downward revision in our EPS estimates and the weaker profit growth trend in the next two years. Shenhua’s cash flows remain strong, which has supported the DCF valuation and our continued BUY recommendation. Even with a 20% discount to reflect current weak market conditions the stock appears inexpensive.

Our DCF assumes an 11.2% WACC, a 2.5% long-term growth rate, and a coal price of CNY585/t (basis Qinhuangdao 5,800 kcal/t) in our terminal year of 2017 vs. the current price of CNY620/t. Our target price corresponds to a PBR of 1.25x our forecast 2014 book value, which we see as fair in light of our forecast ROE of 14.5%, revised down from our previous estimate of a 15.8% ROE (and 1.4x PBR).

Comparison to global coal industry group The following graphs indicate Shenhua’s position relative to global coal companies on three metrics using consensus forecasts: ROE, 2014 PBR, and 2014 EV/EBITDA. Shenhua’s ROE is among the highest in the industry, though it has fallen a few percent over the past few years due to the corporate strategy of adding third party coal sales volumes and lower coal prices during 2013 YoY.

The second graph below ranks Shenhua’s PBR, the position of which appears consistent to its ranking on ROE. But Shenhua’s PBR appears a bit low at 1.1x relative to its ROE considering the historical trend, a graph of which is shown in the upper right margin.

The third graph below ranks Shenhua on EV/EBITDA, on which measure the company’s position appears quite low. This appears inconsistent given Shenhua’s high ROE and strong market position relative to the peer group. We think one aspect of this undervaluation is due to the wider discount of China shares vs. the global peer group, particularly vs. those in the U.S.

However, if investors are applying a hefty risk premium to Chinese stocks, why is it particularly true for Shenhua, whose valuation on this measure is below Yanzhou and China Coal? Perhaps a better explanation can be obtained by analysing the factors behind the relatively low multiples within the mining sector of the large diversified mining companies BHP,

Shenhua ROE vs. Price to BV ratio

Source: Bloomberg, Shenhua, Maybank Kim Eng estimates.

Shenhua PBR bands

Source: Bloomberg, Shenhua, Maybank Kim Eng estimates.

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January 20, 2014 7

 

China Shenhua Energy

Vale, and Rio. These companies have lower earnings and share price volatility compared to the smaller single commodity producers due to their quality low cost asset bases and relatively stable profit margins. Therefore, they have garnered lower average earnings multiples throughout the cycle compared to smaller companies who experience very low/negative earnings at the bottom of the cycle.

By comparison, Shenhua has fallen from the ranks of quality growth cyclical due to the negative EPS trend and the structural issues facing the coal market (slowing consumption/fragmented supply). The business diversification plan being pursued by management has helped stabilize the company’s earnings and share price despite falling coal prices, but it has come at a cost. The next step is for management to return the company to a path of quality growth by stabilizing profit margins. Otherwise, the current path will lead to a further erosion of the valuation multiple as the company develops into a broad industrial benchmark with industry average profit margins and low/no profit growth.

 

Shenhua ranks highly on ROE and PBR vs. the global peer group, but low on EV/EBITDA. Its low EV multiple is more akin to a mature cyclical company with slow but stable growth. But in the case of Shenhua, the EV multiple will remain low vs. the peer group unless it stabilizes the ROE and finds profitable growth alternatives. Is it a stable growth company or cyclical play on commodity prices? Its valuation reflects neither basket at the current time.

 

January 20, 2014 8

 

China Shenhua Energy

Figure 6: ROE of selected global coal companies based on 2014 consensus data*

Source: Bloomberg Consensus.

Figure 7: Price to Book value ratios of selected global coal companies based on 2014 consensus data*

Source: Bloomberg Consensus.

Figure 8: EV/EBITDA ratios of selected global coal companies based on 2014 consensus data*

Source: Bloomberg Consensus.

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January 20, 2014 9

 

China Shenhua Energy

 

FYE 31 Dec (CNY m) FY11A FY12A FY13E FY14E FY15EKey MetricsP/E (reported) (x) 7.4 6.9 7.7 7.8 7.5Core P/E (x) 7.4 6.9 7.7 7.8 7.5P/BV (x) 1.5 1.3 1.2 1.1 1.0P/NTA (x) 1.1 1.0 0.8 0.8 0.7Net dividend yield (%) 5.3 5.7 5.1 5.0 5.2FCF yield (%) 7.7 5.0 7.5 10.7 15.4EV/EBITDA (x) 6.9 6.9 4.8 4.5 4.1EV/EBIT (x) 8.5 8.7 6.1 5.8 5.2

Income StatementSales 209,225.0 250,260.0 264,526.0 279,905.7 297,799.7Gross profit 80,587.0 82,506.0 82,553.4 86,250.7 89,557.6EBITDA 84,531.0 87,754.0 87,810.3 90,957.0 93,604.0Depreciation (14,992.1) (17,141.7) (18,278.1) (18,752.9) (18,856.3)Amortisation (832.9) (1,008.3) (1,142.4) (1,250.2) (1,346.9)EBIT 68,706.0 69,604.0 68,389.8 70,953.9 73,400.9Net interest income /(exp) (2,204.0) (2,071.0) (2,383.8) (2,080.8) (1,600.4)Associates & JV 346.0 477.0 500.0 500.0 500.0Exceptionals 0.0 0.0 0.0 0.0 0.0Other pretax income 1.0 1.0 321.0 0.0 0.0Pretax profit 66,849.0 68,011.0 66,827.0 69,373.1 72,300.5Income tax (14,041.0) (10,965.0) (12,769.8) (13,874.6) (14,460.1)Minorities (6,962.0) (8,188.0) (10,280.8) (12,487.2) (13,014.1)Reported net profit 45,846.0 48,858.0 43,776.4 43,011.3 44,826.3Core net profit 45,846.0 48,858.0 43,776.4 43,011.3 44,826.3

Balance SheetCash & Short Term Investments 61,652.0 51,627.0 33,851.1 44,885.0 77,342.7Property, Plant & Equip (net) 223,329.0 236,048.0 279,901.8 297,262.1 310,375.1Intangible assets 3,610.0 3,781.0 3,800.0 3,800.0 3,800.0Investment in Associates & JVs 3,992.0 4,689.0 5,000.0 5,000.0 5,000.0Other assets 113,924.0 161,222.0 190,332.8 189,012.7 177,085.8Total assets 406,507.0 457,367.0 512,885.8 539,959.8 573,603.6ST interest bearing debt 16,489.0 28,093.0 28,000.0 28,000.0 28,000.0LT interest bearing debt 45,443.0 39,624.0 33,151.0 28,151.0 28,151.0Other liabilities 76,461.0 83,093.0 113,833.8 113,927.3 114,220.0Total Liabilities 138,393.0 150,810.0 174,984.8 170,078.3 170,371.0Shareholders Equity 228,199.0 256,589.0 287,938.0 308,529.5 335,373.5Minority Interest 39,915.0 49,968.0 55,108.4 61,352.0 67,859.0Total shareholders equity 268,114.0 306,557.0 343,046.4 369,881.5 403,232.6

Cash FlowPretax profit 66,849.0 68,011.0 66,827.0 69,373.1 72,300.5Depreciation & amortisation 15,825.0 18,150.0 19,420.5 20,003.1 20,203.1Adj net interest (income)/exp (88.0) (239.0) 2,534.8 2,080.8 1,600.4Change in working capital 498.0 (1,394.0) 4,443.3 (3,742.4) 6,211.9Cash taxes paid (11,830.0) (14,689.0) (12,769.8) (13,874.6) (14,460.1)Other operating cash flow (305.0) (784.0) (792.0) (500.0) (500.0)Cash flow from operations 70,949.0 69,055.0 79,663.8 73,340.0 85,355.8Capex (45,082.0) (52,256.0) (54,506.0) (37,363.3) (33,316.2)Free cash flow 25,867.0 16,799.0 25,157.8 35,976.7 52,039.7Dividends paid (14,917.0) (17,901.0) (19,094.0) (17,072.8) (16,774.4)Equity raised / (purchased) 0.0 0.0 0.0 0.0 0.0Change in Debt (16,493.0) 1,565.0 (6,566.0) (5,000.0) 0.0OTH investing/financing cash flow (10,096.0) (10,491.0) (17,273.6) (2,870.1) (2,807.6)Effect of exch rate changes (11.0) 3.0 0.0 0.0 0.0Net cash flow (15,650.0) (10,025.0) (17,775.9) 11,033.9 32,457.7

 

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FYE 31 Dec (CNY m) FY11A FY12A FY13E FY14E FY15EKey RatiosGrowth ratios (%)Sales growth 32.7 19.6 5.7 5.8 6.4EBITDA growth 18.7 3.8 0.1 3.6 2.9EBIT growth 19.4 1.3 (1.7) 3.7 3.4Pretax growth 19.5 1.7 (1.7) 3.8 4.2Reported net profit growth 18.1 6.6 (10.4) (1.7) 4.2Core net profit growth 18.1 6.6 (10.4) (1.7) 4.2

Profitability ratios (%)EBITDA margin 40.4 35.1 33.2 32.5 31.4EBIT margin 32.8 27.8 25.9 25.3 24.6Pretax profit margin 32.0 27.2 25.3 24.8 24.3Payout ratio 39.0 39.1 39.0 39.0 39.0

DuPont analysisNet profit margin (%) nm 19.5 16.5 15.4 15.1Sales/Assets (x) 0.5 0.5 0.5 0.5 0.5Assets/Equity (x) 1.8 1.8 1.8 1.8 1.7ROAE (%) 18.1 17.0 13.5 12.1 11.6ROAA (%) 11.8 11.3 9.0 8.2 8.1

Liquidity & EfficiencyCash conversion cycle nm nm 2.8 8.9 8.2Days receivable outstanding 21.5 24.2 28.7 31.3 33.2Days inventory outstanding 34.3 30.2 37.0 40.0 37.5Days payables outstanding 60.8 58.8 62.9 62.5 62.5Dividend cover (x) 2.6 2.6 2.6 2.6 2.6Current ratio (x) 1.2 1.1 0.9 1.0 1.2

Leverage & Expense AnalysisAsset/Liability (x) 2.9 3.0 2.9 3.2 3.4Net debt/equity (%) 0.1 6.3 9.5 3.7 nmNet interest cover (x) 31.2 33.6 28.7 34.1 45.9Debt/EBITDA (x) 0.7 0.8 0.7 0.6 0.6Capex/sales (%) 21.5 20.9 20.6 13.3 11.2Net debt/ (net cash) 280.0 16,090.0 27,299.9 11,266.0 (21,191.7)

 

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Research Offices

REGIONAL WONG Chew Hann, CA Regional Head of Institutional Research (603) 2297 8686 wchewh@maybank-ib.com ONG Seng Yeow Regional Head of Retail Research (65) 6432 1453 ongsengyeow@maybank-ke.com.sg Alexander GARTHOFF Institutional Product Manager (852) 2268 0638 alexgarthoff@kimeng.com.hk ECONOMICS Suhaimi ILIAS Chief Economist Singapore | Malaysia (603) 2297 8682 suhaimi_ilias@maybank-ib.com Luz LORENZO Philippines (63) 2 849 8836 luz_lorenzo@maybank-atrke.com Tim LEELAHAPHAN Thailand (662) 658 1420 tim.l@maybank-ke.co.th JUNIMAN Chief Economist, BII Indonesia (62) 21 29228888 ext 29682 Juniman@bankbii.com Josua PARDEDE Economist / Industry Analyst, BII Indonesia (62) 21 29228888 ext 29695 JPardede@bankbii.com MALAYSIA WONG Chew Hann, CA Head of Research (603) 2297 8686 wchewh@maybank-ib.com • Strategy • Construction & Infrastructure Desmond CH’NG, ACA (603) 2297 8680 desmond.chng@maybank-ib.com • Banking & Finance LIAW Thong Jung (603) 2297 8688 tjliaw@maybank-ib.com • Oil & Gas - Regional • Shipping ONG Chee Ting, CA (603) 2297 8678 ct.ong@maybank-ib.com • Plantations - Regional Mohshin AZIZ (603) 2297 8692 mohshin.aziz@maybank-ib.com • Aviation - Regional • Petrochem YIN Shao Yang, CPA (603) 2297 8916 samuel.y@maybank-ib.com • Gaming – Regional • Media TAN Chi Wei, CFA (603) 2297 8690 chiwei.t@maybank-ib.com • Power • Telcos WONG Wei Sum, CFA (603) 2297 8679 weisum@maybank-ib.com • Property & REITs LEE Yen Ling (603) 2297 8691 lee.yl@maybank-ib.com • Building Materials • Glove Producers CHAI Li Shin (603) 2297 8684 lishin.c@maybank-ib.com • Plantation • Construction & Infrastructure KANG Chun Ee (603) 2297 8675 chunee@maybank-ib.com • Consumer Ivan YAP (603) 2297 8612 ivan.yap@maybank-ib.com • Automotive LEE Cheng Hooi Regional Chartist (603) 2297 8694 chenghooi.lee@maybank-ib.com Tee Sze Chiah Head of Retail Research (603) 2297 6858 szechiah.t@maybank-ib.com

HONG KONG / CHINA Howard WONG Head of Research (852) 2268 0648 howardwong@kimeng.com.hk • Oil & Gas - Regional Alexander LATZER (852) 2268 0647 alexanderlatzer@kimeng.com.hk • Metals & Mining - Regional Alison FOK (852) 2268 0630 alisonfok@kimeng.com.hk • Consumer Jacqueline KO, CFA (852) 2268 0633 jacquelineko@kimeng.com.hk • Consumer Karen KWAN (852) 2268 0640 karenkwan@kimeng.com.hk • Property & REITs Osbert TK TANG, CFA (86) 21 5096 8370 osberttang@kimeng.com.hk • Transport & Industrials Philip TSE, CFA FRM (852) 2268 0643 philiptse@kimeng.com.hk • Property & REITs Ricky WK NG, CFA (852) 2268 0689 rickyng@kimeng.com.hk • Utilities & Renewable Energy Simon QIAN, CFA (852) 2268 0634 simonqian@kimeng.com.hk • Telecom & Internet Steven ST CHAN (852) 2268 0645 stevenchan@kimeng.com.hk • Banking & Financials Warren LAU (852) 2268 0644 warrenlau@kimeng.com.hk • Technology – Regional William YANG (852) 2268 0675 williamyang@kimeng.com.hk • Technology – Regional INDIA Jigar SHAH Head of Research (91) 22 6623 2601 jigar@maybank-ke.co.in • Oil & Gas • Automobile • Cement Anubhav GUPTA (91) 22 6623 2605 anubhav@maybank-ke.co.in • Metal & Mining • Capital Goods • Property Urmil SHAH (91) 22 6623 2606 urmil@maybank-ke.co.in • Technology • Media SINGAPORE NG Wee Siang Head of Research (65) 6432 1467 ngweesiang@maybank-ke.com.sg • Banking & Finance Gregory YAP (65) 6432 1450 gyap@maybank-ke.com.sg • SMID Caps – Regional • Technology & Manufacturing • Telcos Wilson LIEW (65) 6432 1454 wilsonliew@maybank-ke.com.sg • Property Developers ONG Kian Lin (65) 6432 1470 ongkianlin@maybank-ke.com.sg • S-REITs James KOH (65) 6432 1431 jameskoh@maybank-ke.com.sg • Consumer - Regional YEAK Chee Keong, CFA (65) 6432 1460 yeakcheekeong@maybank-ke.com.sg • Offshore & Marine Derrick HENG (65) 6432 1446 derrickheng@maybank-ke.com.sg • Transport (Land, Shipping & Aviation)   WEI Bin (65) 6432 1455 weibin@maybank-ke.com.sg • Commodity • Logistics • S-chips John CHEONG (65) 6432 1461 johncheong@maybank-ke.com.sg • Small & Mid Caps • Healthcare

INDONESIA Wilianto IE Head of Research (62) 21 2557 1125 willianto.ie@maybank-ke.co.id • Strategy Rahmi MARINA (62) 21 2557 1128 rahmi.marina@maybank-ke.co.id • Banking & Finance Aurellia SETIABUDI (62) 21 2953 0785 aurellia.setiabudi@maybank-ke.co.id • Property Anthony YUNUS (62) 21 2557 1136 anthony.yunus@maybank-ke.co.id • Consumer • Poultry Isnaputra ISKANDAR (62) 21 2557 1129 isnaputra.iskandar@maybank-ke.co.id • Metals & Mining • Cement Pandu ANUGRAH (62) 21 2557 1137 pandu.anugrah@maybank-ke.co.id • Infrastructure • Construction • Transport Janni ASMAN (62) 21 2953 0784 janni.asman@maybank-ke.co.id • Cigarette • Healthcare • Retail Lucky ARIESANDI, CFA (62) 21 2557 1127 lucky.ariesandi@maybank-ke.co.id • Telcos • Media PHILIPPINES Luz LORENZO Head of Research (63) 2 849 8836 luz_lorenzo@maybank-atrke.com • Strategy Laura DY-LIACCO (63) 2 849 8840 laura_dyliacco@maybank-atrke.com • Utilities • Conglomerates • Telcos Lovell SARREAL (63) 2 849 8841 lovell_sarreal@maybank-atrke.com • Consumer • Media • Cement Rommel RODRIGO (63) 2 849 8839 rommel_rodrigo@maybank-atrke.com • Conglomerates • Property • Gaming • Ports/ Logistics Katherine TAN (63) 2 849 8843 kat_tan@maybank-atrke.com • Banks • Construction Ramon ADVIENTO (63) 2 849 8845 ramon_adviento@maybank-atrke.com • Mining THAILAND Maria LAPIZ Head of Institutional Research Dir (66) 2257 0250 | (66) 2658 6300 ext 1399 Maria.L@maybank-ke.co.th • Consumer / Materials Jesada TECHAHUSDIN, CFA (66) 2658 6300 ext 1394 Jesada.T@maybank-ke.co.th • Financial Services Kittisorn PRUITIPAT, CFA, FRM (66) 2658 6300 ext 1395 Kittisorn.P@maybank-ke.co.th • Real Estate Sittichai DUANGRATTANACHAYA (66) 2658 6300 ext 1393 Sittichai.D@maybank-ke.co.th • Services Sector Sukit UDOMSIRIKUL Head of Retail Research (66) 2658 6300 ext 5090 Sukit.u@maybank-ke.co.th Mayuree CHOWVIKRAN (66) 2658 6300 ext 1440 mayuree.c@maybank-ke.co.th • Strategy Padon VANNARAT (66) 2658 6300 ext 1450 Padon.v@maybank-ke.co.th • Strategy

Surachai PRAMUALCHAROENKIT (66) 2658 6300 ext 1470 Surachai.p@maybank-ke.co.th • Auto • Conmat • Contractor • Steel Suttatip PEERASUB (66) 2658 6300 ext 1430 suttatip.p@maybank-ke.co.th • Media • Commerce Sutthichai KUMWORACHAI (66) 2658 6300 ext 1400 sutthichai.k@maybank-ke.co.th • Energy • Petrochem Termporn TANTIVIVAT (66) 2658 6300 ext 1520 termporn.t@maybank-ke.co.th • Property Woraphon WIROONSRI (66) 2658 6300 ext 1560 woraphon.w@maybank-ke.co.th • Banking & Finance Jaroonpan WATTANAWONG (66) 2658 6300 ext 1404 jaroonpan.w@maybank-ke.co.th • Transportation • Small cap Chatchai JINDARAT (66) 2658 6300 ext 1401 chatchai.j@maybank-ke.co.th • Electronics VIETNAM LE Hong Lien, ACCA Head of Institutional Research (84) 844 55 58 88 x 8181 lien.le@maybank-kimeng.com.vn • Strategy • Consumer • Diversified • Utilities THAI Quang Trung, CFA, Deputy Manager, Institutional Research (84) 844 55 58 88 x 8180 trung.thai@maybank-kimeng.com.vn • Real Estate • Construction • Materials TRUONG Thanh Hang (84) 844 55 58 88 x 8085 hang.truong@maybank-kimeng.com.vn • Consumer Le Nguyen Nhat Chuyen (84) 844 55 58 88 x 8082 chuyen.le@maybank-kimeng.com.vn • Oil & Gas NGUYEN Thi Ngan Tuyen, Head of Retail Research(84) 8 44 555 888 x 8081 tuyen.nguyen@maybank-kimeng.com.vn • Food & Beverage • Oil&Gas • Banking NGUYEN Trung Hoa, Dy Head of Retail Research (84) 8 44 555 888 x 8088 hoa.nguyen@maybank-kimeng.com.vn • Macro • Steel • Real estate TRINH Thi Ngoc Diep (84) 4 44 555 888 x 8208 diep.trinh@maybank-kimeng.com.vn • Technology • Utilities • Construction TRUONG Quang Binh (84) 4 44 555 888 x 8087 binh.truong@maybank-kimeng.com.vn • Rubber plantation • Tyres and Tubes • Oil&Gas PHAM Nhat Bich (84) 8 44 555 888 x 8083 bich.pham@maybank-kimeng.com.vn • Consumer • Manufacturing • Fishery NGUYEN Thi Sony Tra Mi (84) 8 44 555 888 x 8084 mi.nguyen@maybank-kimeng.com.vn • Port operation • Pharmaceutical • Food & Beverage

 

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China Shenhua Energy

  

Malaysia Maybank Investment Bank Berhad (A Participating Organisation of Bursa Malaysia Securities Berhad) 33rd Floor, Menara Maybank, 100 Jalan Tun Perak, 50050 Kuala Lumpur Tel: (603) 2059 1888; Fax: (603) 2078 4194

Singapore Maybank Kim Eng Securities Pte Ltd Maybank Kim Eng Research Pte Ltd 9 Temasek Boulevard #39-00 Suntec Tower 2 Singapore 038989 Tel: (65) 6336 9090 Fax: (65) 6339 6003

London Maybank Kim Eng Securities (London) Ltd 6/F, 20 St. Dunstan’s Hill London EC3R 8HY, UK Tel: (44) 20 7621 9298 Dealers’ Tel: (44) 20 7626 2828 Fax: (44) 20 7283 6674

New York Maybank Kim Eng Securities USA Inc 777 Third Avenue, 21st Floor New York, NY 10017, U.S.A. Tel: (212) 688 8886 Fax: (212) 688 3500

Stockbroking Business: Level 8, Tower C, Dataran Maybank, No.1, Jalan Maarof 59000 Kuala Lumpur Tel: (603) 2297 8888 Fax: (603) 2282 5136

Hong Kong Kim Eng Securities (HK) Ltd Level 30, Three Pacific Place, 1 Queen’s Road East, Hong Kong Tel: (852) 2268 0800 Fax: (852) 2877 0104

Indonesia PT Maybank Kim Eng Securities Plaza Bapindo Citibank Tower 17th Floor Jl Jend. Sudirman Kav. 54-55 Jakarta 12190, Indonesia Tel: (62) 21 2557 1188 Fax: (62) 21 2557 1189

India Kim Eng Securities India Pvt Ltd 2nd Floor, The International 16, Maharishi Karve Road, Churchgate Station, Mumbai City - 400 020, India Tel: (91).22.6623.2600 Fax: (91).22.6623.2604

Philippines Maybank ATR Kim Eng Securities Inc. 17/F, Tower One & Exchange Plaza Ayala Triangle, Ayala Avenue Makati City, Philippines 1200 Tel: (63) 2 849 8888 Fax: (63) 2 848 5738

Thailand Maybank Kim Eng Securities (Thailand) Public Company Limited 999/9 The Offices at Central World, 20th - 21st Floor, Rama 1 Road Pathumwan, Bangkok 10330, Thailand Tel: (66) 2 658 6817 (sales) Tel: (66) 2 658 6801 (research)

Vietnam Maybank Kim Eng Securities Limited 4A-15+16 Floor Vincom Center Dong Khoi, 72 Le Thanh Ton St. District 1 Ho Chi Minh City, Vietnam Tel : (84) 844 555 888 Fax : (84) 8 38 271 030

Saudi Arabia In association with Anfaal Capital Villa 47, Tujjar Jeddah Prince Mohammed bin Abdulaziz Street P.O. Box 126575 Jeddah 21352 Tel: (966) 2 6068686 Fax: (966) 26068787

South Asia Sales Trading Kevin FOY kevinfoy@maybank-ke.com.sg Tel: (65) 6336-5157 US Toll Free: 1-866-406-7447

North Asia Sales Trading Alex TSUN alextsun@kimeng.com.hk Tel: (852) 2268 0228 US Toll Free: 1 877 837 7635

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