What's new
On December 6, Shaanxi Coal Industry announced plans to acquire a stake in Shaanxi Coal Power1 and pay a dividend for 3Q24.
Comments Acquisition of assets to boost earnings and improve stability ofearnings. Shaanxi Coal Industry announced plans to acquire an 88.65% stake in Shaanxi Coal Power in cash from Shaanxi Coal and Chemical via a non-public agreement. We expect the acquisition to help Shaanxi Coal Industry reduce related-party transactions and increase revenue.
Meanwhile, we think Shaanxi Coal Industry could smooth out the impact from cyclical fluctuations in coal prices and improve the stability of its earnings by leveraging its integrated coal and power generation business model. In such a context, we think the firm's dividend payouts are likely to improve further.
Power company to be acquired mainly focuses on thermal power.
Based on the asset assessment report for the acquisition, Shaanxi Coal Power mainly focuses on thermal power and controls 18,300MW of coal- fired power generation capacity, including 8,300MW of coal-fired power generation capacity in operation and 10,000MW of coal-fired power generation capacity under construction (we estimate the total construction cost for the 10,000MW of coal-fired power generation capacity under construction will be about Rmb30-40bn, based on the per-unit cost data of leading companies' coal-fired power generation facilities under construction).
Power company to be acquired enjoys solid profitability. Based on itsfinancial data, Shaanxi Coal Power's net profit attributable to shareholders was Rmb2,067mn in 2023 (implying a net profit margin of 11.7% and ROE of 22%) and Rmb1,358mn in January-October 2024 (implying a net profit margin of 11.6% and ROE of 13.9% in 10M24). As of 3Q24, net profit margins of 29 listed companies in the CSI thermal power sector of the A- share market averaged 7.9% (maximum level at 22.8%, median level at 7.3%) and their ROE (TTM) averaged 5.9% (maximum level at 17.1%, median level at 6.5%) over 1-3Q24.
The valuation of the power company to be acquired implies a 1.5xP/B ratio, not at a high level. Based on the asset assessment report for the acquisition, the book value of Shaanxi Coal Power's assessed net assets is Rmb11.78bn with valuation at Rmb17.70bn, implying a valuation multiple of about 1.5x P/B for the acquisition. The acquisition of an 88.65% stake in Shaanxi Coal Power implies a price of Rmb15.70bn. The valuation multiple for the acquisition of a stake in Shaanxi Coal Power is lower than the average P/B (MRQ) of the 29 listed companies in the CSI thermal power sector of the A-share market (1.88x as of December 6).
Planning to pay a dividend for 3Q24 to reward investors. Shaanxi CoalIndustry plans to pay a dividend of Rmb0.103/sh (tax included) for 3Q24, equivalent to 19% of the firm's EPS in 3Q24. Coupled with its dividend of Rmb0.103/sh (tax included) for 1H24, we estimate that the firm may pay a cumulative cash dividend of Rmb0.212/sh for 1-3Q24 (tax included), equivalent to 12.9% of the firm's EPS in 1-3Q24.
Financials and valuation
We keep our earnings forecasts and target price unchanged.
Risks
Demand recovery and/or progress of projects disappoint.
