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China Shenhua Energy

Beijing approves Shenhua-Guodian marriage to become the world’s biggest energy juggernaut

The merger is part of efforts to raise competitiveness of central government-controlled enterprises and over time, cut their number down to 40

PUBLISHED : Monday, 28 August, 2017, 7:54pm
UPDATED : Monday, 28 August, 2017, 11:18pm

The merger of coal-to-power energy titan Shenhua Group and one of the nation’s big five state-owned power generators, China Guodian Group has received Beijing’s blessings, which will create the world’s largest power utility firm.

“With approval by the State Council, China Guodian Group and Shenhua Group will be merged and restructured into State Energy Investment Group,” Sate-owned Assets Supervision and Administration Commission, the manager of state firms under the direct supervision of the central government said in a statement on its web site on Monday.

The impending merger will see Shenhua, the nation’s largest coal miner with 420 million tonnes of annual capacity absorb Guodian’s 65 million tonnes and further its leading position on the fossil fuel.

It will also amalgamate Guodian’s 143 giga-watt (GW) of power generation capacity with Shenhua’s 83 GW, creating a 226 GW behemoth surpassing current leader China Huaneng Group’s 165.5 GW.

Guodian, already the world’s largest wind farm operator with 26 GW of capacity, will widen the gap with its domestic rivals further, after combining with Shenhua’s 7.4 GW wind capacity.

“The merged entity will have a market leading position in north China’s power market and seaborne coal sales ... we believe in the next three years, State Energy Investment will continue to consolidate other players both up and downstream of the supply chain,” said ICBC International analyst Zhao Dongchen in a note early this month.

The merger is part of Beijing’s ongoing effort to enhance competitiveness of the central government’s enterprises through mergers and acquisitions, with a long term target to cut their number to 40 from the current 98.

China Shenhua posts 143 per cent interim profit growth on higher coal prices and steady unit production cost

As both the coal and electricity industries had suffered from periods of low profitability in the past few years due to overcapacity, they have also become a prime target for consolidation.

The merged entity will have a market leading position in north China’s power market and seaborne coal sales ... we believe in the next three years, State Energy Investment will continue to consolidate other players both up and downstream of the supply chain
Zhao Dongchen, ICBC International

Frank Yu, principal consultant, Asia-Pacific Power and Renewables at Wood Mackenzie noted that Guodian will be able to better manage its coal supply and price risks, and access Shenhua’s integrated infrastructure of coal freight railways, ports and shipping fleet to lower transportation cost.

It can also tap into Shenhua’s ample cash to lower debt.

Although Guodian’s total assets of 797 billion yuan was around 19 per cent less than Shenhua’s 979 billion yuan (US$147.8 billion) at the end of last year, its much higher debt meant Guodian only had net assets of 146 billion yuan, much lower than Shenhua’s 516 billion yuan.

Ling Wen, vice chairman of China Shenhua, Shenhua’s listed flagship, would not provide details about the potential impact of the merger on the listed unit in a press briefing on Monday.

But he said the listed firm had slashed its output target for this year, first unveiled in March, by 6.7 per cent to 278 million tonnes, and that of sales by 2.7 per cent to 396 million tonnes, as two mines were forced to cut or stop production amid negotiations with local governments on mining rights.

China Shenhua shares fall as mining disruption crimps earnings

Meanwhile, general manager of Shandong province-based rival Yanzhou Coal Mining, Wu Xiangqian expects the company’s Yancoal Australia unit to return to profit in the year’s second half due to higher coal prices, and the completion of the acquisition of a 51 per cent stake in Coal & Allied from commodities giant Rio Tinto this week.

China Shenhua on Monday closed up 2.1 per cent to HK$19.60, while Yanzhou surged 3.1 per cent to HK$7.59, outperforming the Hang Seng Index’s 0.1 per cent rise. Both companies reported sharp interim profit jumps and have projected coal prices to remain steady in the year’s second half after a 18-month rally.

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