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.