YZC: The Only Way to Play China's Coal Dependence

| About: Yanzhou Coal (YZC)
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Countries in emerging markets have seen broad economic gains over the past few years. These gains create more demand for energy. China is a good example. As China saw a large increase in manufacturing, people moved from rural areas to urban ones to find jobs and pursue a better life. Since Chinese companies were willing to make products for much less than competitors around the world, this expansion has increased. As these businesses have thrived their factories have become larger and the number of those factories has increased. The people moving to the city move to apartments or houses. Each and everyone of these dwellings needs energy. From heating, refrigeration, and television sets, all need electricity. During the "Chinese Industrial Revolution", there have been large increases in energy usage, but also pollution. It seems that China has a very large deposit of coal. This deposit has been relied upon heavily.

China’s large supply of coal is stripped by its own demand. In 2009, China produced 44% of the world’s coal, but still imports due to large usage. In 2010 coal saw an estimated 35% increase in price. Much of this demand and pollution has pushed China to develop an aggressive plan to begin building nuclear reactors. They are hoping to be able to reduce their dependence on coal to enough of an extent that they will no longer have to import. Until that time comes, they will continue to mine and use coal as their main source of electricity.

Yanzhou Coal Mining Company (NYSE:YZC) is the only Chinese coal company that is traded at home and abroad. I first made a call to buy this company on the updown on 3/12/08. Since the call the company is up 106.24%. The main driver of my belief the company would continue to do well was based on the Chinese need for cheap energy. Since coal is the most cost effective means to produce electricity, this company looks to have exciting growth opportunities.

There are several reasons for Yanzhou Coal Mining Company’s success. The first is location. They are centered just adjacent to coal importing countries South Korea and Japan. This is important as they have their own transportation network that allows for easy movement to these countries. This location allows for easy transportation to major areas within China. The company owned railroad is also connected to all mines. This way they use the central location of the company as a hub to all areas of production and usage. They also have a river wharf for easy transport across water ways to the Grand Canal of Beijing. This has helped build a customer base in China, but more importantly gave them access to Northeast Asia.

Yanzhou Coal Mining Company manages all aspects of the coal production process. They prepare, process, market then transport the coal to their customer base. They have six coal mines that in 2007 produced almost 35 million tons of raw coal of which 7.25 million tons were exported. They have several more mines that can still be brought into production if demand warrants it.

Over the last ten years YZC has transformed into a much different company. Since 2001, there has been a change to improve capital operation. They started with the purchase of the Jinging 3 coal mine for the purpose of increasing production to help meet demand. In 2002, they purchased the railroad asset to better serve their customers through transport. In 2004 they purchased their first overseas coal mine. The Austar coal mine was put into operation in 2006. Yanzhou Coal Mining Company continues to look for ways to expand production while decreasing expenses.

This company has a market cap of 14.68B and a PE of 13.6. There may be some hesitancy to purchase Chinese companies as there are fears of China’s possible tightening of interest rates. They have a decent profit margin of 23.03% and operating margin of 27.88%. Quarterly revenue growth year over year is 63.4% and quarterly earnings has growth of 227.3%. They have total cash of $1.5 billion and total debt of $3.29 billion.

In summary, this company is well placed for growth. Current economics in China will help Yanzhou Mining Company to grow for years to come. Even with the large runup in share price over the short term, their prospects look good.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.