August 28, 2017
By Bloomberg, with assistance by Aibing Guo, Jing Yang, Francois De Beaupuy and Chiara Albanese
The government of President Xi Jinping approved the merger of Shenhua Group Corp., the country’s top coal miner, with China Guodian Corp., among its largest power generators, the State-owned Assets Supervision and Administration Commission said Monday. With assets of 1.8 trillion yuan ($271 billion), the new entity will be the world’s second-biggest company by revenue and largest by installed capacity, according to Bloomberg New Energy Finance.
The Shenhua-Guodian tie-up may be the first of a handful of mergers in China’s power industry as top policy makers try to cut industrial overcapacity and the number of state-owned enterprises. Monday’s announcement concludes months of speculation about the combination, first reported by Bloomberg in June.
“People have been waiting for the other shoe to drop,” said Tian Miao, a Beijing-based senior analyst at Sun Hung Kai Financial Ltd. “This confirms the direction of state-owned enterprise reform, with companies in the same industry merging to reduce redundant investment and improve efficiency.”
Neither Shenhua nor Guodian’s Beijing-based spokesmen answered calls to their offices seeking comment or replied to emailed questions. About three hours before Sasac’s one-sentence statement was released Monday, Ling Wen, Shenhua’s acting chairman, told reporters in Hong Kong that the company still hadn’t received merger approval.
The new company, expected to be called National Energy Investment Corp., will have installed capacity of more than 225 GW, topping Electricite de France SA and Enel SpA, according to Frank Yu, an analyst at Wood Mackenzie Ltd. EDF, as the French generator is known, had net installed capacity of 137.5 GW last year, according to a company presentation. Italy’s Enel had total installed capacity of 83 GW as of June 30, it said.
Shenhua will be able to lower its reliance on coal-fired capacity, currently about 90 percent, by gaining some of Guodian’s clean energy assets, Yu wrote in a research note earlier this month. Guodian, meanwhile, will be able to benefit from Shenhua’s coal supply and price risk management, as well as its integrated infrastructure of railways, harbors and ships.
Shares of Shenhua’s Hong Kong-listed unit, China Shenhua Energy Co., rose as much as 4.7 percent to HK$20.10 on Monday, before paring its gain to close up 2.1 percent. The benchmark Hang Seng Index ended little changed.
As part of the merger, China Shenhua Energy may acquire Guodian’s Shanghai-listed GD Power Development Co., Bloomberg news reported in late June. GD Power trading has been suspended since June 5, as have China Shenhua Energy’s Shanghai shares.
Shenhua had 1.014 trillion yuan in assets, it said in a report in June, and its listed unit produced about 290 million tons of coal last year. Guodian had total assets of 803 billion yuan, according to a statement from the company posted by state-backed industry group China Electricity Council. Shenhua had 82 GW of generating capacity, while Guodian had 145 GW, according to BNEF.
Coal & Renewables
Xi’s government is also seeking to lower the country’s reliance on coal power and increase the use natural gas, as well as wind,solar, hydropower and nuclear. The generation capacity of the merged company will be 23 percent renewables, according to BNEF.
“This is crucial for Shenhua since due to new changes, wind, solar, nuclear and hydro generation hours are still guaranteed by regulators, while coal generators must increasingly compete in liberalized wholesale markets,” BNEF analyst Sophie Lu wrote in an Aug. 9 report. “This is only one in a series of mega-mergers China plans for power sector consolidation.”
The government may also seek a way to bundle nuclear power generators into the mega-merger mix, according to Wood Mackenzie’s Yu.
“The ultimate goal is to form bigger energy companies that can hedge against market risks between coal and power,” Yu said. “Or they can sell their nuclear technology or their coal-power technology to emerging markets in Asia. That’s what the government wants to promote.”
China Huaneng Group, the country’s biggest coal-fired power producer, may merge with State Power Investment Corp., a coal-fired generator that also owns State Nuclear Power Technology Corp., Bloomberg reported in May. SPIC Chairman Wang Binghua said in July that the company is in contact with Huaneng Group about a restructuring and “something big may happen later.”
China Huadian Corp. and China Datang Corp. are the remaining two of China’s big-five state-power generators.