A shares of Shenhua and GD Power suspended for trading
Shenhua (601088 CH, CNY22.3) and GD Power (600795 CH, CNY3.6)announced on 4 June that their A-shares will suspend trading starting 5 June,due to “significant matters under uncertainties”. According to China Shenhua,Shenhua-H (1088 HK) won’t be suspended. We believe the suspension ofShenhua-A/GD Power might result in positive implications to Shenhua-H.
This triggers several possible inferences
(1) Potentially Shenhua and GD Power (not H-listed) might be selected by theChina government to implement the first case of coal/power SOEs'consolidation; (2) Datang might not be acquired by Shenhua as media hasspeculated (Bloomberg); and (3) if Shenhua/GD Power consolidation ultimatelyhappens, how would the merged group be restructured and what would helpboth sides unlock value? For (3), we believe a potential structure might involvemerging both companies at the group level and then restructuring the postmergergroup’s assets into several listed entities, as has been typical in thespace.
Potential positive implications to Shenhua-H
Though the potential merger might happen only at the group level, we seepossible positive implications for Shenhua-H (which is not suspended fortrading) for several reasons: (1) investors are starting to have higher convictionabout China government's SOE reforms agenda; (2) post the most recentmarket close, Shenhua-A/GD Power/Shenhua-H are trading at (ex-dividend)1.3x/1.29x/0.9x 2017DBe BVPS. With Shenhua-A trading slightly higher thanGD Power and both at meaningful premiums to Shenhua-H, investors wouldlikely view a potential transaction between Shenhua-A and GD Power asunlocking value for Shenhua-H shareholders.
Ultimately, new structure and valuations remain to be seen
According to the experience of Baosteel/Wugang merger, the first suspensionof both listed companies lasted for more than three months before valuationsfor the transactions were announced. We think what would drive real valuecreation would be based on the post-merger’s new structure and valuations oftransactions involved. Before any further detailed announcements, we believethe market will be more positive than negative about these preliminaryannouncements with the consideration of unlocking Shenhua-H’s value.