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Rating Action:

Moody's upgrades Yanzhou Coal to Ba3; outlook stable

 The document has been translated in other languages

12 Apr 2018

Hong Kong, April 12, 2018 -- Moody's Investors Service has upgraded to Ba3 from B1 the corporate family rating of Yanzhou Coal Mining Company Limited.

Moody's has also upgraded to Ba3 from B1 the senior unsecured debt rating on the bonds issued by Yancoal Int'l Resources Development Co., Ltd and guaranteed by Yanzhou Coal.

The ratings outlook is stable.

RATINGS RATIONALE

"The upgrade reflects our expectation that Yanzhou Coal's improved credit metrics will be sustained over the next 12-18 months," says Gerwin Ho, a Moody's Vice President and Senior Credit Officer, and also the International Lead Analyst for Yanzhou Coal.

Yanzhou Coal recorded a good performance in 2017, with its revenues and adjusted EBITDA up 58% and 93% year-on-year, respectively. Its EBITDA margins also increased to 37.5% in 2017 from 30.8% in 2016.

These improvements stemmed from a 26.1% year-on-year increase in the average selling price of the company's produced coal, while its production volume also increased 28.2% year-on-year to 79.9 million tons.

Accordingly, Yanzhou Coal's adjusted debt/EBITDA and EBIT/interest improved to 4.4x and 3.5x in 2017 from 7.2x and 1.8x in 2016.

"Moody's expects the Chinese government's supply-side reforms for the coal industry will help stabilize domestic coal prices," says Cindy Yang, a Moody's Assistant Vice President and Analyst, and also the Local Market Analyst for Yanzhou Coal.

In addition, Moody's expects Yanzhou Coal's production volume will increase to around 100 million tons in 2018 from 79.9 million tons in 2017 due to the full-year contribution from its newly acquired Coal & Allied mines as well as production ramp-up in its new mines, including Ordos, Haosheng and Moolarben Phase II.

Accordingly, Moody's expects that the company will maintain its improved credit metrics, with debt/EBITDA below 5.0x and EBIT/interest around 3.0x. These levels support its standalone credit profile.

Yanzhou Coal's Ba3 corporate family rating incorporates a two-notch uplift from Moody's expectation of extraordinary financial support from the Shandong Provincial Government through Yanzhou Coal's parent Yankuang Group Corporation Limited in times of financial distress.

Moody's support assumption considers (1) Yankuang Group's 100% ownership by the Shandong Provincial Government; (2) Yanzhou Coal's dominant position and strategic importance as the group's flagship company and the continued support from the provincial government for both Yanzhou Coal and Yankuang Group; (3) the importance of Yanzhou Coal's mining assets to the Shandong Province in terms of economic contributions and employment; (4) Yankuang Group's 55.25% direct and indirect stake in Yanzhou Coal as of 31 December 2017, and the control it has over its board of directors and appointment of senior management; and (5) Yankuang Group's track record of providing financial support to Yanzhou Coal.

The Shandong Provincial Government's standalone ability to provide support is based on its status as an upper-tier regional and local government with national strategic importance.

These factors are counterbalanced by the primarily commercial nature of Yanzhou Coal's operations, which results in a lower likelihood of support from the government than for entities with significant public policy mandates.

The company's standalone credit profile is underpinned by its (1) diversified coal mining assets and good related infrastructure, and (2) good-quality coal and low-cost mining operations in Shandong Province.

These strengths are partly offset by (1) its moderately high debt leverage following years of expansion and acquisitions; and (2) execution and financial risks from its investments in the financial sector.

The stable outlook incorporates Moody's expectation that over the next 12-18 months (1) the company's credit metrics will be maintained at levels appropriate for its current standalone credit quality; (2) there will be no material change in its overall business profile, its strategic importance to its parent and the parent's ability to provide support; and (3) Yanzhou Coal will not increase substantially its investments in the financial sector.

Yanzhou Coal's ratings could be upgraded if the company shows improvements and more stability in its financial profile, and absent material changes in the parental support assessment.

Credit metrics indicative of upward rating pressure include adjusted debt/EBITDA below 3.5x-4.0x and EBIT/interest above 3.5x on a sustained basis.

The two-notch uplift for expected government support through Yankuang Group is unlikely to be increased, given the primarily commercial nature of Yanzhou Coal's operations.

Yanzhou Coal's ratings would be downgraded if there is a material deterioration in its business or financial profile.

Credit metrics indicative of downward rating pressure include adjusted debt/EBITDA above 5.5x and/or EBIT/interest below 2.0x.

The ratings could also be downgraded if Moody's expects a decline in parental support due to a decline in the importance of Yanzhou Coal to its parent, a material weakening of the parent's credit quality, or reduced linkage with the Shandong Provincial Government.

The principal methodology used in these ratings was Mining Industry published in April 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Yanzhou Coal Mining Company Limited listed on the Shanghai and Hong Kong stock exchanges in 1998. As of 31 December 2017, it was 55.25%-owned by Yankuang Group Corporation Limited, a state-owned enterprise that is in turn wholly owned by the Shandong Provincial Government.

As of 31 December 2017, Yanzhou Coal owned and operated various coal mines across China and Australia, including in Shandong and Shanxi provinces and the Inner Mongolia Autonomous Region in China, as well as in the Australian states of Queensland, New South Wales and Western Australia.

The Local Market analyst for these ratings is Cindy Yang, +86 (10) 6319-6570.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

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Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

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The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.

Gerwin Ho
Vice President - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Gary Lau
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

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