Shenhua approves joint venture company with Guodian usingcoal-fired power plant assets
We believe this is positive for Shenhua, it may lead to higherasset efficiency and Shenhua keeps high quality coal assets
Maintain Buy with unchanged target price of HKD26.30
Shenhua announced the approval of a joint venture company with Guodian theevening of 28 August. In this joint venture, Shenhua will inject 19 coal-fired powerplants with a total installed capacity 32.4GW (c60% of Shenhua’s total coal-firedpower capacity of 54.5GW) valued at RMB29bn. Guodian will inject 21 coal-firedpower plants with a total installed capacity of 34.3GW valued at RMB37bn. Earlier inthe afternoon on 28 August, the state council approved the merger of the Shenhuagroup and the Guodian group with the combined entity to be named “National EnergyInvestment Corp” (translation).
We think this marks the beginning of the asset restructuring under the combinedNational Energy Investment Corp entity. We noticed that all of the assets to beallocated to the proposed joint venture are coal-fired power plants and that Shenhuahas chosen power plants that are in the same regions (Shanxi, Inner Mongolia,Ningxia, Jiangsu, Zhenjiang) as Guodian’s. We believe this is being done to reduceregional competition and create synergies among these assets.Overall we believe this plan is share price positive because not only might it leadto higher asset efficiency but also Shenhua is keeping all of its higher quality coalassets in the listco intact. The market has been concerned that Shenhua might buyadditional power assets and drag down the company’s overall profitability; this planshould remove this negative overhang, in our view.
Valuations and risks: We keep our Shenhua H share target price unchanged atHKD26.30 and maintain our Buy rating. Our TP is based on our DCF valuation on thefollowing unchanged parameters: cost of capital of 10.5%, adjusted beta of 1.15measured against the HSCEI, risk-free rate of 2.5%, market risk premium of 6%, andterminal FCF growth after 2045 of 0%, and assuming the company remains in a netcash position in the long run. Our H-share target price implies c34% upside from thecurrent share price, and we consequently rate the stock as Buy.
Key downside risks to our view on the H-shares are weaker-than-expected coalprices or power tariff, delays in supply-side rationalisation beyond our currentassumptions, weaker-than-expected reduction in cost of coal and power production,and slower or higher cost development of new projects than we now forecast.