Prices to impact Shenhua offering
(China Daily)
Updated: 2005-06-08 08:50

China Shenhua Energy, which plans the world's biggest initial public offering this year, may be forced to sell its stock toward the bottom of the proposed range because coal prices have almost peaked, investors said.

The company may price its shares at about HK$7.85 (US$1) each, or 10.5 times forecast 2005 profit, according to the median estimate in a Bloomberg survey of 10 fund managers. The investors, who manage a total of US$26 billion of Asian stocks, said coal prices may end almost three years' of gains in 2006, combining with a higher tax burden to slow Shenhua's earnings growth.

"Market sentiment toward coal producers is already weak and the sector may get derated," said Liu Yang, who helps manage US$1.8 billion for Atlantis Investment Management Ltd in Hong Kong. "We would prefer to see pricing within the lower half of the proposed range."

Surging coal prices, which Beijing-based Shenhua said will help boost 2005 profit by 58 per cent, may stop climbing next year as supply catches up with demand. Asian benchmark contract prices may rise by 18 per cent this year and be flat in 2006 before starting to decline during 2007, Deutsche Bank AG said in a report on April 14.

Shares of Yanzhou Coal Mining Co, the only Chinese coal miner listed overseas, have declined by 8.4 per cent since the start of this year. The stock is trading at 7.7 times this year's profit estimated by 25 analysts, according to Bloomberg data.

Shenhua plans to raise as much as US$3.6 billion and last month offered 3.0635 billion shares at between HK$7.25 (93 US cents) and HK$9.25 (US$1.18) each, its sale document shows. That values the company at 9.7 times to 12.5 times projected 2005 earnings of 14.1 billion yuan (US$1.7 billion).

The company plans to fix the price of its shares today, with the stock expected to start trading on June 15.

Shenhua may have room to raise coal prices in the next two or three years, bucking the industry trend for a decline, because the world's fifth-largest coal producer has been selling its production cheaply to lure customers, Chairman Chen Biting said on June 1.

Shenhua raised the average price of its coal by 26 per cent last year to 245 yuan (US$29.60) a ton. That is 10 per cent less expensive than Yanzhou Coal, a Shandong Province-based coal producer that listed in Hong Kong in 1998. Yanzhou Coal sold the fuel at an average of 272.31 yuan (US$32.77) a ton last year.

Ports, railways

Shenhua, which owns ports and operates one of two railway lines that carry coal from the country's west to its eastern coast, recorded higher prices in 2002 and 2003, its sale document shows. Because of the transport network it owns, Shenhua includes freight costs in its prices, unlike Yanzhou Coal.

"If transportation costs are excluded, Shenhua's average coal selling price is competitive against its peers," Geoffrey Cheng, director of equity research at Daiwa Institute of Research, said by telephone from Hong Kong.

Shenhua can sell its shares at a premium to Yanzhou Coal's because the Beijing-based company has three times larger reserves and does not face the capacity limits constraining production growth at its smaller rival, said investors such as Agnes Deng.

"We're impressed by the size and quality of the assets Shenhua has built up," Deng, who helps manage US$2.5 billion at Standard Life Investments in Hong Kong, said. "While it deserves to be priced at a premium over its domestic peers, it shouldn't be too demanding."

Shenhua's proved coal reserves amounted to 5.9 billion metric tons, which is second only to Peabody Energy Corp, the world's biggest publicly traded coal producer. Those supplies may enable the company to meet demand in China, the world's biggest coal producer and consumer, where the fuel is burnt to meet 67 per cent of energy needs.

Yanzhou Coal, whose parent ranks fourth among the nation's coal producers, has reserves of 2 billion tons, its Chief Accountant Zhang Baocai said on June 3.

The resources tax paid by coal producers in seven provinces and one municipality was raised starting on May 1, the State Administration of Taxation said. Shenhua has not received notification of any increase in its tax charges yet, Chairman Chen said on June 1.

The rebate paid to coal exporters was cut to 8 per cent from 11 per cent, from May 1, to enhance domestic supply and stabilize prices, the Ministry of Finance said on April 29. The impact on Shenhua is "insignificant," Chen said.

"The policy environment is not as favourable to coal companies these days and that makes us less bullish about the industry in general," said Stella Lau, who helps manage US$1.3 billion at East Asia Asset Management in Hong Kong. "The level of interest in Shenhua now depends highly on its valuation."

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