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Yanzhou Coal Mining Co. Ltd. ADS (YZC)
PRICE
CHANGE
U.S. dollars 69.41
0.91
5/6
Huaneng Power International Inc. ADS (HNP)
PRICE
CHANGE
U.S. dollars 30.39
-0.06
5/6
* At Market Close
RELATED INDUSTRIES
• Energy
China's Energy Needs Light Up
Prospects for Coal, Power Stocks
By MEI FONG
Staff Reporter of THE WALL STREET JOURNAL
April 29, 2005
SHANGHAI -- China's continuing energy shortage is helping stoke interest in planned stock-market listings by the country's two biggest coal producers. Analysts say the still-surging Chinese appetite for electricity and an expected round of power-price increases by regulators ahead of the peak summer manufacturing season are adding a shimmer to the coming listings and existing energy plays. But questions about whether recent heavy investments could spawn a power oversupply are casting a cloud over the sector in the long term.
Shenhua Energy, China's largest coal producer by volume, aims to have a dual listing in Hong Kong and Shanghai in May that would raise US$3 billion -- which would make it the country's biggest initial public offering in nearly two years. China National Coal Group, the second-largest coal producer, is planning a US$1 billion IPO on Hong Kong's stock exchange by the end of the year.
So far, one company in China's highly fragmented coal industry has gotten an overseas listing. It's Yanzhou Coal Mining, which also has American depositary receipts that are traded on the New York Stock Exchange.
Rising coal prices have given Yanzhou a boost. On Monday, Yanzhou said its 2004 net profit rose to 3.15 billion yuan ($380.6 million) from 1.39 billion yuan a year earlier, which caused its Hong Kong-listed shares to jump 7% to HK$10.70 (US$1.37) on Tuesday. On Thursday, the company said its net profit during the first quarter of 2005 was 792.7 million yuan, compared with 391.9 million yuan in the same period of 2004. Its shares rose 1% to close at HK$10.55.
Also Thursday, shares of another company in China's power industry, machinery supplier Shanghai Electric Group, began trading on the Hong Kong Stock Exchange after raising US$648 million in an IPO. The shares closed at HK$1.71 each, one Hong Kong cent above their IPO price.
Not all China energy plays are good bets, analysts say. The analysts have concerns about the future of China's independent power producers, which must contend with high production costs, including coal costs and shipping rates, but can't fully pass on those expenses to consumers, under state regulations.
But many other energy-related companies are continuing to benefit from China's growing power requirements, analysts say. These include coal producers; shipping companies that carry coal; power-equipment suppliers; natural-gas suppliers; and companies that make the diesel generators that factory owners depend on during brownouts and blackouts.
"Demand is not the problem, but power-sector costs are growing faster than demand," says Manoj Sangiambut, CLSA's senior analyst for Asian-Pacific markets. So "coal has strength" and natural gas has good prospects too, but the outlook for China's independent power producers -- including Hong Kong-listed Huaneng Power International and Datang International Power Generation -- is "flaccid," he says.
Mou Qizheng, an analyst for Shenyin Wanguo Securities in Shanghai, says Shenhua, which has the largest high-quality coal reserves in China , has several advantages over other state-run producers. Set up less than 25 years ago, the young company doesn't have the social-security burdens that plague older state-owned mines. Shenhua also has diversified into power generation and transportation -- other businesses that have bottlenecks as well as voracious market demand, she says.
China's demand for coal is likely to stay strong in the next five years as long as the economy keeps growing more than 8% per year, ensuring "a bright prospect for most listed coal companies in the long run," Ms. Mou says.
However, other industry analysts warn that a trend of rising coal prices is likely to slow down, following Chinese government measures announced last year to rein in overdevelopment of energy-consuming industries.
Some analysts are wondering how long China will face energy shortages. "People are a little nervous about oversupply [of power] in some areas," says Alice Hui, regional utilities and power analyst at UBS Hong Kong. "There could be just another year of power shortage in China ."
Other analysts point out that electricity consumption has outstripped China's economic growth since 1999 and might continue to do so.
While soaring coal prices depressed investor sentiment about China's power plants for most of 2004, there is one bright spot this year: The government says it will implement a tariff increase in the next month, linking power tariffs to fuel-cost inflation and enabling producers to pass on more of their costs to customers.
Still, many industry watchers say they believe rising coal prices could outweigh the benefits of a tariff increase. The new raises in tariffs should be "the last piece of good news for the sector," says CLSA's Mr. Manoj, who wrote in a research report that "any optimism on this new policy should be viewed as an exit point for investors."
Even power companies that don't use coal have problems. Hydroelectric-power producer China Yangtze Power was previously an analyst darling, as it didn't have to worry about coal prices or how to deal with regulatory pressure to generate renewable energy sources.
However, the Shanghai-listed company fell from favor earlier this month when it reported a 27% year-to-year decline in first-quarter net profit to 343 million yuan due to escalating costs. The company, a unit of government-owned China Three Gorges Project, which is in charge of the world's largest hydropower project, said Thursday that it hopes to sell up to four billion yuan in short-term debt. Shares of China Yangtze closed 1.7% higher Thursday at 8.39 yuan.
---- Qiu Haixu in Beijing contributed to this article.
Write to Mei Fong at mei.fong@wsj.com
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