Yanzhou may pay high price for rail network
Yanzhou Coal Mining's share price plunged 7.6 per cent to HK$2.42 yesterday after announcing it was buying a coal transportation rail network from its parent at a valuation higher than its own.
Analysts were concerned the proposed acquisition would deplete the company's cash reserve and force it to finance future acquisitions by issuing new shares which would dilute the value of existing shares.
The H share, whose four old coal mines have reached peak production capacity while its newly acquired mine is running at 62.5 per cent capacity, would need to buy more mines to grow.
'It is not abnormal for coal mines to own railways, but after this deal Yanzhou will be left with no cash for [mergers and acquisitions]. We believe it must buy new mines to grow,' said European brokerage UBS Warburg in a research report.
The company has 1.2 billion yuan (about HK$1.12 billion) cash and is due to repay 1.2 billion yuan before the end of next year to its parent over the acquisition of a coal mine.
It plans to pay for the rail network in cash and or bank borrowings. It initially intends to borrow 800 million yuan to 1.2 billion yuan.
Yanzhou proposed buying a 184-kilometre rail network from its parent at 1.22 billion yuan, or about 10 times the estimated net profit of the network this year of slightly more than 120 million yuan.
Some analysts said the price was high compared with Yanzhou's share price-to-forecast earnings multiple of about 7.5 times this year.