An energy giant is born: China Shenhua and GD Power to merge coal power assets

The resultant China Energy Group will have total assets worth over US$9.05 billion

PUBLISHED : Tuesday, 29 August, 2017, 1:13pm
UPDATED : Tuesday, 29 August, 2017, 10:56pm

The listed flagship companies of state-owned coal giant Shenhua Group and power major China Guodian Group have proposed to merge their coal-fired power assets, worth over 60 billion yuan (US$9.05 billion).

The new combination of China Shenhua Energy and GD Power will be jointly owned, but GD Power will have the controlling stake, both sides said in separate filings.

Shenhua Group, the parent of Hong Kong and Shanghai-listed Shenhua will be renamed China Energy Investment, which will merge with Guodian, and the merged entity will be known as China Energy Group. GD Power will become a subsidiary of China Energy.

“The [final] shareholding percentage of the joint venture company will be negotiated by the parties, taking into account the valuation of the subject assets,” China Shenhua said.

The two listed firms signed a joint venture framework agreement on Monday, on which the impending merger of Shenhua and Guodian was approved by the State-owned Assets Supervision and Administration Commission.

The formation of the coal-fired power joint venture will also be subject to financial audit and assets valuations, which will need the approved of both boards, and independent shareholders.

There was no information suggesting how many jobs might be lost as a result of the merger.

China Shenhua said the coal-fired power assets it will inject into the joint venture had a total estimated net asset value of 29.3 billion yuan, encompassing a 32.5 giga-watt of annual capacity and 4GW under construction.

Those to be contributed by GD Power are estimated by Beijing China Enterprise Appraisals to be worth 37.4 billion yuan, involving 34.3 GW of installed capacity and 7.6 GW of projects under construction.

China Shenhua said the coal-fired assets merger was prompted by Beijing’s so-called “supply side” structural reform, which aims to rid excess production capacities and enhance efficiency.

All the plants involved will be brought under one operation in some locations, it said, adding “the transaction will facilitate scale operation and professional management ... strengthen regional competitiveness and avoid disorderly competition”.

Some analysts, however, are sceptical the merger will bring about significant reduction in generation capacity any time soon.

“You cannot eliminate excess capacity simply by merging companies, but [the merger will help] relieve the pain [arising from ongoing] of power market reforms, which will end up cutting inefficient capacities via market forces,” said Daiwa Capital Markets’ research head Dennis Ip.

He expects the reform will eventually see over 80 per cent of the power sold in the nation subject to negotiated volumes and prices.

Currently 20 to 30 per cent of Chinese power producers’ output is bilaterally negotiated, with the rest still sold at state-stipulated regional benchmark prices.

Excess capacity and intensifying competition have weakened power producers’ bargaining positions against large users, meaning agreed prices are generally at discounts to state prices.

Shares in China Shenhua rose as much as 1.9 per cent higher in Hong Kong soon after the market opened on Tuesday, but traded just 0.16 per cent lower at HK$19.44 by the lunchtime close, underperforming the Hang Seng Index’s 0.36 per cent fall.

In Shanghai, trading of China Shenhua and GD Power’s shares remain suspended.