China Shenhua Energy Company Limited (601088.SH) announced on March 17 evening in its 2016 annual report that it achieved revenue of 183.127 billion yuan in 2016, representing a year-on-year growth of 3.4 percent, and a net profit of 22.712 billion yuan, up 40.7 percent from a year earlier.
Shenhua Energy explained that in 2016, the company actively practiced the state’s policies for industrial adjustment, gave full scope to its advantages in integration, achieved great results in cost control and business coordination, saw constant improvement in market share and overall competitiveness, and saw large increase of operation performance.
The Securities Daily reported that as “the most profitable coal enterprise” in China, the 2016 annual results of Shenhua Energy basically meet market’s expectation. What wins the capital market’s applause is not the company’s profitability but its generosity in repaying investors.
According to the announcement, the Board recommends the payment of: (1) a final dividend in cash of 0.46 yuan per share or 9.049 billion yuan for the year of 2016; and (2) a special dividend in cash of 2.51 yuan per share or 49.923 billion yuan. The dividend totals 59.072 billion yuan or 2.97 yuan per share, representing a dividend rate of 18 percent and 2.6 times of the net profit in 2016.
As estimated, the company’s stocking and inflowing operation funds are able to cover the cash dividend, and no significant negative influence will be brought to the company’s financial status. The special dividend announced this time takes up 47.5 percent of the company’s undistributed profit in 2015 and 32.4 percent of the company’s undistributed profit in 2016.
As influenced by factors such as rebound of coal price, the year-on year increase in profit for the period attributable to equity holders of the company in January to March 2017 is expected to reach or exceed 50%.
Shenhua Energy also believed that at present, its asset-liability ratio is relatively low in the industry. Capital expenditures in recent years have decreased from that of previous years, and the company will see sound inflow of operational cash flow in a period ahead. On the precondition of guaranteeing healthy and sustainable development, the Board proposes aforementioned suggestions for dividends to increase return to investors. The suggestions are in line with China Securities Regulatory Commission (CSRC)’s guidance encouraging listed companies to provide cash dividend.
Shen Meng, executive director of Chanson & Co which is a boutique investment bank in China, remarked that on the one hand, Shenhua Energy is a winner amid the coal de-capacity process of China; on the other hand, launching dividend is required to improve the performance of Shenhua Energy’s parent company. Shenhua Energy announces high dividend for the purposes of rewarding its parent company and disposing previous undistributed profit.
It is noteworthy that the “generosity” of Shenhua Energy is supported by its ample capital.
Shenhua Energy announced in January 2017 that it had entered into entrusted asset management agreements with relevant branches of China Construction Bank and Industrial and Commercial Bank of China in the latter part of December 2016. The company would purchase financing products worth less than 33 billion yuan, and financing products worth 31 billion yuan had been purchased before Dec. 28, 2016.
In addition, the risk of 90-day financing products bought by Shenhua Energy is very low.
Paving way for M&A and reorganization of central coal SOEs
In fact, the coal industry is still faced with heavy task for de-capacity this year. The industry believes that the high dividend of Shenhua Energy might have something to do with the merger & acquisition (M&A) and reorganization of the coal industry.
Shen indicated that there are two ways to dispose previous undistributed profit. The first is to convert the profit into share capital, and the second is to directly announce cash dividend. Since the coal industry sees excessive capacity now and Shenhua Energy enjoys obvious cost advantage in the industry, the company’s demand for capital expenditure is decreasing and there is no need for the company to reserve too much cash. In addition, direct cash dividend can ease the parent company’s pressure on cash demand.
According to the annual report, Shenhua Group now holds 73.06 percent equities of Shenhua Energy. In other words, Shenhua Group will pocket 43.2 billion yuan of the 59-billion-yuan dividend.
Shen believed that Shenhua Group might use the money to merge and reorganize other central coal state-owned enterprises (SOEs), build new coal bases and invest in other coal-related projects.
Of note, a focus of the de-capacity in the coal industry this year is to advance the M&A and reorganization of coal enterprises.
The State-owned Assets Supervision and Administration Commission (SASAC) claimed earlier that the number of central SOEs will be cut to within 100. The SASAC will steadily push group-level M&A and reorganization forward, and move faster in facilitating the integration of iron & steel, coal and power business.
The official integration of Baosteel and Wuhan Iron and Steel Company earlier marks the beginning of M&A and reorganization in the iron & steel industry and also provides the M&A and reorganization in other industries with experience. It is expected that the M&A and reorganization of the coal and power industries will be prioritized in 2017.
“In the face of great pressure on reorganization, especially personnel placement due to cut of outdated capacity, coal enterprises are heavily burdened by capital demand”, Shen indicated that as the most profitable coal enterprise, Shenhua Energy possibly will act as the platform to integrate outdated capacity. For instance, local government alone is not able to solve the problem of Heilongjiang Longmay Mining Holding Group Co., Ltd. now, but it is almost impossible for the central government to have a hand in too.
The analyst also told the journalist that large coal companies with no debt burden might lead the M&A and reorganization in the coal industry.
Guo Jingpu, an analyst with Cinda Securities, claimed in multiple research reports that as a leading company in the coal industry, Shenhua Energy ranks top in the industry in terms of both capacity and output, and is quite influential in affecting the trend of the coal industry and coal price. At present, the P/E ratio of Shenhua Energy is the lowest in the whole coal sector. Considering the rebound and the M&A and reorganization of the coal industry, Shenhua Energy, a leading coal company, will play a main role in the integration and benefit most in the industrial reshuffle.
Translated by Jennifer Lu