Yanzhou Coal (YZC) reported FY13 that beat expectations, as its principalShandong operations staged a solid 2H13 performance. While coal marketsremain depressed, we see limited downside at current levels. With consensusupgrades likely, in our view, and YZC shares trading near historical lows, weview favorable risk-reward and upgrade to OW rating. FY13 results above guidance. YZC reported FY13 NPAT of RMB777munder IFRS (-87% yoy). Excluding forex losses and asset impairment(pretax RMB3.3Bn), we estimate core NPAT of RMB3.4Bn, -8% yoy,ahead of estimates (JPMe: RMB2.6Bn, Street; RMB1.0Bn). Better-thanexpectedcost reduction (-8% yoy, JPMe -7%) and coal sales volume (+12%yoy, JPMe +5%) helped cushion ASP falls (-13% yoy). Pleasingly, YZC’sprincipal Shandong operations (76% of 2013 GP) performed strongly in2H13, with GP of Rmb334/t, +33% hoh. That said, negative operating cashflow (-RMB2.2Bn, IFRS) and free cash flow (-RMB11.9Bn) pushed netgearing (ND/E) higher to 111% (2012: 63%). DPS of Rmb2 cents wasdeclared at a 13% payout ratio (2012: 29%). 2014 plan – +7% self produced coal sales, +3% capex. YZC believes theoversupplied situation is keeping coal prices at low levels. For 2014, YZCtargets stable coal sales (+1% yoy) with higher self produced coal sales(69Mt, +7% yoy) offset by lower coal trading with similar capex (+3% yoy).No cost target was provided. We keep our 2014 and 2015 forecastsunchanged, 88% and 72% above consensus, respectively. Upgrade to OW rating, keep price target at HKD8.00. Given the coreearnings beat, we expect consensus upgrades will likely provide near-termsupport for YZC shares. With YZC shares now trading near historical lowsat 0.5x PB, we see favorable risk-reward. In the near term, Daqin rail'soverhaul and IPP summer restocking in May-June should stabilize coalmarkets. Upgrade to OW rating (from N), keep PT Dec-14 at HKD8.00.

Baosteel held its FY12 investor conference on 1 April 2013. In summary,while industry overcapacity is expected to persist with export markets andsteel plates to remain weak, management expects operating conditions in 2013to be better than 2012 and remains upbeat on its Zhanjiang project. Keypoints: Like-for-like sales to be flat. Baosteel provided guidance for crude steeloutput of 22.56Mt and sales volume of 22.26Mt, down 7% and 6% yoy,respectively. However, stripping out the contributions of the divestedstainless and special steel divisions, volumes were broadly flat yoy, with themarginal reduction due to a planned blast furnace overhaul. Overcapacity remains a structural issue but 2013 operating conditionslikely better than 2012. According to company statistics, China’s crudesteel production capacity is estimated to be c920Mt as at the end of 2012while output was 717Mt (operating at 78% utilization) with apparentconsumption at 672Mt. The company forecasts 2013 crude steel output togrow by 2.8% yoy to c737Mt, while apparent consumption is forecast at698Mt (+3.9% yoy). While management did not provide a specific forecastfor industry capacity, it noted that capacity utilization will likely remain atc75%, which implies 2013E capacity at c982Mt (+6.7% yoy). That said,Baosteel commented in its FY12 results that 2013 operating conditionswould likely be better than 2012. Bright prospects for the Zhanjiang project. Management sees theZhanjiang project as the strategic future of the company. Baosteel is lookingto position the under-construction 8Mt project at the cutting edge ofoperating efficiency, targeting high-end market segments such asautomobiles and home appliances. Chinese steel exports facing trade frictions. Despite the majority ofChinese steel production being consumed domestically and less than 10%being sold through export markets, Baosteel notes that there have been risingtrade-related frictions involving China. Anti-dumping and anti-subsidy tradecases that have traditionally been an issue in Europe and North America areemerging in South-East Asia, Latin America and other emerging economics. Given these are China's primary export markets, Baosteel expects thatChinese steel export volumes are likely to be capped although the companyis looking to maintain its own export sales ratio at c10% in 2013E. Plate market remains weak. Baosteel expects the medium and thick platemarket to remain weak over the medium term, given: 1) Oversupply andovercapacity in the domestic plate market, 2) growing plate capacity inSouth Korea, 3) No obvious catalysts for a demand uplift from themachinery sector. Following the closure of its Luojing facilities in 2012,Baosteel still expects to produce c1.2Mt of medium and thick plate goingforward. Given the current weakness in the plate market, it will look tominimize losses and focus on cost control and improved marketing efforts.

Following in the footsteps of Baosteel, Angang has announced a series ofasset divestments and transfers with its parent that should strengthen itsprofitability and balance sheet. Along with lower depreciation charges that itrecently announced, we upgrade core 2013E profits to Rmb1.5bn (fromRmb0.4bn). With a rebound in the steel cycle currently under way, Angangremains our top pick in the sector for its leverage to flat steels.

Baosteel continues to stand tall in a sector struggling to generate profits,delivering a commendable set of numbers in 3Q during a sharp steelindustry downturn. With a bottoming of the current steel cycle emerging,Baosteel announced its buy-in to a new 10mtpa steel project. Given itsdomestic dominance in high end steels and an attractive yield, stay OW. Solid 3Q core results. Baosteel reported headline 3Q12 net income ofRmb1.18Bn. Excluding a Rmb490m pre-tax gain on the sale of stainlesssteel assets, we estimate a core 3Q12 NPAT of Rmb814m (JPMe:Rmb1bn, consensus Rmb863m), -48% qoq / -35% yoy. Revenues fell by5% qoq primarily from a from a 12% fall in ASPs despite a 7% rise involume. Lower operating and SG+A costs (-4% and -14% qoqrespectively) were not sufficient to prevent a 45% fall in 3Q OP fell by45% with OP margins down to 6.5% (2Q12: 8.1%). Positive free cashflow in 3Q (Rmb1.5bn) helped to push ND/E down to 40% (1H12 43%). Cautious 4Q outlook, buys into Zhanjiang project – keep forecastsunchanged. Baosteel forecasts 4Q steel prices to stabilize given‘favorable’ government policies but notes that raw material costs remaina risk. Despite this cautious guidance, we remain optimistic of a 4Qprofit rebound as indicated by spot steel price spreads and keep ourforecasts unchanged (Rmb5bn core profit). In a separate release, theBoard approved the Rmb5bn purchase of an effective c20% stake in the10Mt Rmb40bn Zhanjiang project. Approval has also been granted forthe sale of Baosteel’s Corex assets to its parent (for Rmb2.7bn). At thispoint, no indication of timing has been provided on these events. Keep Dec-12 PT at Rmb6.00. Key PT risks include execution on keygrowth projects, changes in government steel industry policies,fluctuations in steel and raw materials prices. Baosteel is also vulnerableto any auto industry downturn as it is its highest margin business.