Seeking Alpha: China Shenhua Muddling Through Better Than Most

Six months ago I was pretty down on Yanzhou Coal (YZC), as I didn't like the company's asset mix or cost structure relative to other Chinese coal companies like China Shenhua Energy (OTCPK:CSUAY) or Indonesia's PT Bukit Asam (OTCPK:TBNGY). Since mid-December, Yanzhou's ADRs have fallen more than 13%, while Shenhua's shares have fallen about 7% and Bukit Asam's have risen about 5%. In that time, coal markets really haven't improved much as supply continues to stay well ahead of demand and producers are loath to close capacity.

Not all coal companies are the same, though, and this could be a reasonable time to consider China Shenhua. The company has large thermal coal reserves, but also highly integrated coal-fired power generation and railway assets. Though I'm not expecting a fast turnaround in Chinese coal prices, Yanzhou has one of the best cost structures in the business and its parent company could inject addition value-creating assets into the business. At a somewhat distressed multiple of 6x EBITDA these shares offer a decent total return, while a more normalized 7x multiple would offer a good return.

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China Shenhua Muddling Through Better Than Most

Seeking Alpha: High Costs And Leverage Make Yanzhou Coal A Risky Play On Chinese Coal

One way to sum up the general sentiment towards Yanzhou Coal (YZC) is to observe that the shares are down more than 15% over the past month while coal prices in China have increased by around 20%. There are reasons for more optimism about coal prices going into 2014, but Yanzhou's high production costs and high leverage make this a risky and volatile play on higher prices relative to peers like China Shenhua (OTCPK:CSUAY) or China Coal (OTCPK:CCOZY).

I can understand if Yanzhou jumps out as a contrarian play on coal given that generally negative sentiment on the stock. While I won't rule out the possibility that a rising tide of coal prices will lift this boat, I don't see enough undervaluation to compensate for the risks, nor the company's history of taking not-so-shareholder friendly actions.

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High Costs And Leverage Make Yanzhou Coal A Risky Play On Chinese Coal