According to the Stated-owned Assets Supervision and Administration Commission of the State Council (SASAC) and listed companies held by core enterprises in the coal industry, major shareholders of China Shenhua Energy Company Limited (601088) and China Coal Energy Co., Ltd. (601898) are very likely to purchase more shares in the two companies.

Since they went public, stock prices of these two companies have been on a continuous backslide. China Shenhua's and China Coal Energy's stock prices have dropped 30% and 50%, respectively, from their issue prices of RMB 36.99 and RMB 16.83 on 9 Oct 2008. Their corresponding dynamic P/E ratios are 14 and 18, respectively, while their dynamic P/B ratios are 3.2 and 2.2. So far, their A-H premium levels have slumped from China Shenhua's 46.0% and China Coal Energy's 29.6% at the beginning of this year.

Because surging coal prices in the first half of 2008 and stable stock prices in a sluggish A-share market have allowed major shareholders to enjoy adequate cash flow levels, they are likely to boost their holdings. This is set against a background in which the SASAC is encouraging core enterprises to up their shareholdings of listed companies. On 24 Sept 2008, China Coal Energy (CCO) announced that the China National Coal Group Corp., a major shareholder, purchased 4.05 mln of CCO's shares via the Shanghai Stock Exchange. It is widely believed that the shares of China Shenhua also stand a good chance of being purchased by its major shareholders soon.

While a few shareholders may look to invest in small enterprises under large conglomerates or privately-owned listed companies for short-term cash incentives, the majority abide by their own large-scale capital expenditure plans that dampen incentives for increasing their shares in small companies in the long-term.

By extension, those same companies are encouraged to purchase assets from their major shareholders via private placement because of low evaluated stock prices to boost holding in another form. On 24 Sept 2008, in an announcement on its share trading suspension, Anhui Hengyuan Coal Industry and Electricity Power Co., Ltd. disclosed its plan to purchase assets from its controlling shareholder via a private placement.

Even though the holding boost will not change the fundamental situation of the listed companies, with the support of the SASAC, it will reflect the higher investment value of the company in the presence of higher stock prices, as well as stabilize the stock price of the company in the short term. Investors are advised to pay close attetion to China Shenhua (601088) and China Coal Energy (601898).

There still exist uncertainties in the future development of the coal industry as the effect of the aforementioned actions may not be reflected in the short term.


Source: Securities Times

Date: 10 Oct 2008

CN01/SC/DM/NK/KM