The Event

Shenhua Energy (1088 HK/HK$39.68, HOLD; 601088 CH/RMB40.59, NR) has disclosed the detailed terms of the acquisition of twelve assets from its parent China National Energy Group. The total consideration is RMB133.6bn. While the implied 2024 P/E of 49x looks high, it is inflated by the lower-than-normal profit of Inner Mongolia Construction Investment as a result of suspended mining operation and donation. It is also equal to 1.61x P/E as at the end of July 2025.

The company will pay the 30% of the consideration by issuing new A shares to its parent. It will issue 1,363m new A shares at RMB30.38. The remaining 70% will be paid by cash . The company plans to raise RMB20bn by issuing A shares to investors.

Based on 2024 data, the acquisition will boost Shenhua’s coal resources by 65%, recoverable coal reserves by 98% and coal output by 57%. The deal will also increase the capacity of its installed power generation capacity by 28% and production capacity of polyolefin by 2.1x.

According to the company’s estimation, the acquisition will enhance its proforma EPS by 6% in 2024 and 5% in 7M25 based on the 30% share and 70% cash consideration .

To protect its minority shareholders, the company has secured profit guarantees for various coal assets within different target assets for the coming three to six years.

The deal is still subject to approvals from relevant government authorities and approval from independent shareholders.

Our Take

It is good to see the deal will significantly increase the company’s recoverable coal reserves as it effectively increases its mine life from 53.4 years to 67.4 years. The EPS enhancement based on historical data is also positive. The consideration effectively values the target assets at 17x 2025E earnings based on the annualised earnings of 7M25. Even the earnings drop a bit in 2026, the deal should still be EPS enhancing as the company only earns about 2% per annum on its cash.

While the target assets still need total capex of RMB70-80bn over the next five years for the projects under construction or to be built, the operating cashflow of the target assets should be able to cover it.

We would like to raise two minor sticking points about the acquisition. First, the company has secured profit guarantees primarily for the coal projects in the target assets. There is no profit guarantee for the power and coal-chemical operations. Hence, the protection to shareholders is not comprehensive. Second, about 60% of the coal resources of the target assets is in Xinjiang Autonomous Region. Shenhua currently has no coal mining operations in Xinjiang. The coal price in Xinjiang is much lower than the price in Inner Mongolia and Shaanxi Province. Hence, the acquisition could result in lower profitability on per tonne of coal produced over the longer term.

At this stage, we leave our forecasts and HOLD rating unchanged. Our target price for Shenhua’s H shares is HK$42.5 (5% average 2025-27E dividend yield).