Shenhua to See Record Net as Stimulus Boosts Coal Use

By John Duce and Wang Ying

March 30 (Bloomberg) -- China Shenhua Energy Co., the nation’s biggest coal producer, may post a record profit for a second year in 2009 as government efforts to boost economic growth increase demand for the fuel, analysts said.

Net income rose 29 percent to 26.6 billion yuan ($3.9 billion) last year, the Beijing-based company said in a statement on March 27. Profit may increase to 30 billion yuan in 2009, according to the median estimate of nine analysts compiled by Bloomberg News.

The Chinese government announced a 4 trillion-yuan plan in November to boost growth in the world’s third-biggest economy. Shenhua’s ports, railways and power generation businesses should also help it weather the slowdown, said Donovan Huang, an energy analyst at Nomura Securities in Shanghai.

“Shenhua is well placed because its business model is more defensive,” Huang said.

Coal prices at Qinhuangdao, a domestic benchmark, reached a record 1,080 yuan a metric ton in July and have since declined 48 percent to an average 557.5 yuan a ton on slowing demand. China’s economy expanded 6.8 percent in the fourth quarter, the slowest pace in seven years.

“The market is bullish about coal and other commodity stocks because it believes China’s economic stimulus package is beginning to work,” said Martin Wang, an energy analyst at Guotai Junan Securities Hong Kong Ltd. “Power demand appears to be picking up.”

Shenhua held recoverable coal reserves of 7.3 billion metric tons, according to the company’s 2007 annual report. The company’s reserves are second only to Peabody Energy Corp., the world’s biggest publicly traded coal producer.

Power Demand

Shenhua’s shares have risen 6 percent in Hong Kong this year, compared with a 6.5 percent decline in the benchmark Hang Seng Index. Twenty-two out of 27 analysts have a “buy” rating on the shares in a survey compiled by Bloomberg.

Power demand rose for the first time in four months in February and central bank Governor Zhou Xiaochuan said on March 26 that economic indicators are pointing to a recovery. Coal is used to produce about 80 percent of the country’s electricity.

Electricity consumption climbed 4 percent last month after companies in the cement and petrochemical industries increased production, Li Yizhong, the minister for industry and information technology, said on March 10.

Shenhua is confident it can overcome challenges posed by the global financial crisis in the country’s “most difficult year,” Chairman Zhang Xiwu said last week.

Fourth-Quarter Slump

Fourth-quarter profit tumbled 20 percent in the final three months of last year to 3.9 billion yuan, according to Bloomberg calculations made by subtracting earnings for the first nine months from full-year figures. The drop in quarterly earnings is Shenhua’s first since the company’s initial share sale in Shanghai in October 2007. Spokesman Huang Qing declined to comment on the figure.

The state-controlled miner expanded output by 18 percent last year to benefit from soaring energy prices in the first six months. Earnings and prices slumped in the second half as the global economy sank into recession. The company’s full-year profit was below the median estimate of 29 billion yuan in a Bloomberg survey of 26 analysts. The shares fell 5.7 percent to close at HK$17.38 in Hong Kong, the biggest drop since March 2.

Shenhua will cut spending by 16 percent to 29.9 billion yuan this year on slower demand compared with 2008, Shenhua said in its annual report released today.

Coal production may rise 6 percent to 197 million tons compared with an 18 percent gain a year earlier, according to the report. Sales may decline 5 percent to 220 million tons and power generation may drop to 94.1 million megawatt-hours.

Mongolian Mine

The coal producer “made real progress in its overseas development strategy,” Shenhua said in a statement last week. In October 2008, the company won a bid for a mining lease in Australia’s Watermark exploration area, taking its first step in developing coal resources overseas, Shenhua said.

The company is among 10 bidders for Mongolia’s Tavan Tolgoi coal mine, President Ling Wen told reporters in Hong Kong today. Shenhua and about nine other international companies have submitted proposals to the Mongolian government, which has appointed advisers on a possible sale of the mine, Ling said.

The company has also invested in a coal and power project in the South Sumatra province of Indonesia, comprising a mine with an annual capacity 2.3 million tons and a 300-megawatt coal-fired power plant, according to the annual report.

Shenhua may also consider acquiring a coal-to-liquids project from its parent Shenhua Group Corp., Chairman Zhang Xiwu said in a statement today.

Acquisition Plans

This year, Shenhua Energy may pursue domestic and overseas acquisitions, focusing on large-scale integrated coal fields, Zhang said. At the same time, the miner is seeking to control costs, develop high-end products, boost capacity, and strengthen risk management, the chairman said.

Investment in coal projects will fall 35 percent to 9.48 billion yuan and spending on power plants will decline 33 percent to 11.96 billion yuan, Shenhua said in the annual report. Investment in railways will triple to 7.56 billion yuan.

To contact the reporter on this story: John Duce in Hong Kong at jduce1@bloomberg.net; Wang Ying in Hong Kong at ywang30@bloomberg.net