China Shenhua Energy Company

Shenhua hunts for cheap assets in power sector

PUBLISHED : Tuesday, 30 August, 2011, 12:00am
UPDATED : Tuesday, 30 August, 2011, 12:00am

China Shenhua Energy is in talks to buy more power plants. The coal producer hopes to pick up cheap assets in the power sector, which is suffering widespread losses because of state caps on tariffs to curb inflation.

'This is a good time to buy and we are in talks with several targets, but we don't have any specific target in terms of investment and quantity of plants,' chairman Zhang Xiwu said.

Lifting the number of power plants would help lower Shenhua's risks should coal prices fall in the future, Zhang said.

Having partially or wholly invested in 15 coal-fired power plants with total installed capacity of 29 gigawatts and a further 16GW under construction, he said: 'There is still plenty of room to expand'.

In May, Shenhua paid 971.7 million yuan (HK$1.19 billion) for a 51 per cent stake in Luoyang Electric, which has commissioned two 600MW coal-fired units this year in Henan province and plans to build two 1,000MW units.

Zhang said Shenhua was also buying into three plants in the Yangtze River Delta with total generating capacity of 2,520MW.

Sanford Bernstein senior utilities analyst Michael Parker said in a research report that recent purchases by coal producers of power plants indicated they had sensed a risk of weaker coal prices should the mainland economy slow and coal supplies rose in the longer term as a rail transport bottleneck eased.

'Coal miners have a better insight into the dynamics of demand and supply in the Chinese coal and power markets than just about anyone,' Parker said.

According to the China Electricity Council, the five state-owned power generation groups made a combined loss of 18 billion yuan from their coal-fired power business in the first seven months of this year.

Shenhua on Friday posted a 16.5 per cent rise in first-half net profit to 22.73 billion yuan on a 40.5 per cent jump in turnover to 100.69 billion yuan. But operating profit margin fell to 36 per cent from 41 per cent, as Beijing's order to freeze annual coal contract selling prices at last year's level squeezed miners' earnings.

Shenhua reacted by raising the portion of sales to the unregulated cash market to 53.5 per cent of domestic sales, up from 40.9 per cent in the year-earlier period.

President Ling Wen expected the company's full-year coal selling price to rise 3 to 5 per cent, after a 5.5 per cent increase in the first half. Shenhua aims to limit production cost rises to no more than 10 per cent for the year after first-half costs grew 9 per cent.