What happened

China Shenhua Energy (Shenhua) announced its plans to issue shares and pay cash to acquire coal mines, pithead coal power plants, and coal- to-oil, coal-to-gas, and coal chemicals projects from its controlling shareholder, China Energy Investment Corporation. On the evening of August 3, management held a conference call to discuss these asset acquisitions.

Comments

Asset acquisitions: The assets announced to be acquired are mainly prior commitments to address issues of intra-group competition (assets of Ningxia Coal are not included) and other assets relating to Shenhua’s integrated operations. This round of acquisition covers 13 assets, including six coal mines, one integrated coal-power asset, two coal chemicals projects, and four logistics assets (final targets subject to subsequent announcements). We think total coal capacity of these 13 assets may exceed 0.25bnt, with total coal output reaching more than 0.2bnt (in 2024, the company’s coal capacity and output were 0.35bnt and 0.33bnt). Additionally, these assets have over 15 GW of coal-fired power capacity (vs. Shenhua's coal-fired power capacity at 21.75 GW in 2024).

Regarding financial data, combined return on equity (ROE) of these assets is less than 10%, while liability-to-asset ratio exceeds 50% (Shenhua’s ROE and average liability-to-asset ratio were 15% and 25% over 2021- 2024).

We think the firm's own funds can cover the majority of the consideration payment requirements. In early 2025, Shenhua

announced that it would use its own funds to acquire a 100% stake in Hangjin Energy for Rmb852.6mn. The payment consideration implies that the average price of the acquired asset is Rmb6.5 per tonne of resource reserves. Compared to coal mine transactions in the same period, we think this consideration fully respects the interests of Shenhua’s minority shareholders. Over January-August 2024, Hangjin Energy’s principals and interest-bearing debts totaled Rmb11.99bn.

Total net assets of the 13 assets to be acquired by Shenhua range between Rmb100-150bn, and we estimate the consideration for these assets at Rmb150bn if the transaction is priced at 1x P/B. In 2024, Shenhua's cash and held-for-trading financial assets totaled more than Rmb160bn. We believe the firm’s own funds can cover the majority of the　　consideration payment requirements. In our view, this round of share issuance and fundraising may result in a low dilution ratio of equity.

Guidance by management: Stepping up efforts to increase EPS; dividend payments to exceed the commitment level. On the evening of

August 3, management of Shenhua held a conference call to discuss several issues of concern to investors. Our key takeaways are as follows: 1) The firm explained that this round of transactions is aimed at mitigating intra-group competition; 2) the firm repeatedly emphasized that the deal should enhance EPS rather than dilute it; and 3) it will maintain high- return, sustainable dividend payments, and also promised to pay higher- than-commitment-level dividends (the firm announced earlier this year that it would raise the minimum payout ratio from 60% to 65% in 2025-2027).

Risks

Disappointing rebound in coal prices; higher-than-expected consideration for asset acquisitions; lower-than-expected dividends.