March 20, 2017 10:52 pm JST

Chinese government is the biggest beneficiary of Shenhua's fat dividend

State-owned coal producer makes rare apology for mainland smog

JENNIFER LO, Nikkei staff writer

China Shenhua Energy Vice-chairman, Ling Wen, center, delivers the company's annual earnings on Mar. 20. (Photo by Jennifer Lo)

HONG KONG -- China Shenhua Energy shares soared 16.3% to an 18-month high on Monday after it announced a record dividend payout of 59 billion yuan ($8.55 billion) on surging profits and coal prices.

China's largest coal producer by volume, state-owned Shenhua declared Friday a final dividend of 0.46 yuan per share, in addition to a special dividend of 2.51 yuan per share -- its first since 2009 -- after posting its first annual profit growth in four years. The biggest beneficiary of its big dividend payout is its ultimate parent, the Chinese government.

Investors pushed up Shenhua shares to HK$19.14 on Monday, while the Hang Seng China Enterprises Index gained just 0.7%.

Shenhua, which also operates coal-fired power plants and railways, saw its net profit reach 24.9 billion yuan in 2016, up 41.1% on the year. Revenue also grew 3.4% to 183.1 billion yuan on the back of resurgent coal prices following the government's bid to curb industrial overcapacity.

The size of the dividend, far surpassing Shenhua's net profit, nonetheless spurred concerns over the group's financial conditions. But citing its abundant cash, low debt level and the need to "reward" shareholders, Shenhua denied speculation about state intervention in its dividend policy.

"This is solely based on our group's own decision, rather than suggestions from the government or regulators," Vice-chairman Ling Wen said at an earnings briefing in Hong Kong on Monday. Shenhua's retained earnings swelled to 153 billion yuan at the end of December, he said, adding that the group would maintain a payout ratio of about 40%.

Shenhua is 73% owned by parent Shenhua Group, which is wholly owned by the State-Owned Assets Supervision and Administration Commission of China's State Council, making the state its majority shareholder. Shenhua has 17% of its shares floated on the Hong Kong market and the remaining on the Shanghai bourse.

Ling was speaking on behalf of Chairman Zhang Yuzhou, who was said to be absent due to an urgent meeting held in Beijing among the heads of state-owned enterprises. When pressed for details, Ling said he was not "authorized" to speak about the meeting.

Shenhua also made a rare apology for China's air pollution. "As I can see some of you are wearing facial masks today, I would like to express my deep sympathy for this," said Ling, admitting that the coal and power generation industry was under "pressure" due to China's worsening smog.

Deutsche Bank expects a re-rating of Shenhua because of its "concrete shareholder returns" that translated into a 20% dividend yield last year. Others like Macquarie and Morgan Stanley reiterated their "neutral" rating for Shenhua. Macquarie forecast that its impairment loss would grow, after a similar loss of 2.8 billion last year to upgrade its power generation assets amid environmental concerns.

China's top planner, the National Development and Reform Commission, has pledged to slash 150 million tons of coal capacity this year, down 40% from 2016. The production cut nonetheless led to a near 70% surge in coal prices last year, ending four years of decline and prompting the government to ease mining restrictions.

Shenhua has a higher forecast for coal sales at 407 million tons this year, up from its actual sales of 395 million tons last year. It also expects first-quarter net profit to rise at least 50%, after sales volume in the first two months surged 62% on the year.

Asked about the movement of coal prices in China, Shenhua's Senior Vice-president Wang Jinli said: "It should hover at a reasonable range between 500 and 570 yuan this year."

Asia300

China Shenhua Energy Co. Ltd.

China

Market(Ticker): HKG(1088)
Sector:
Industry:
Energy Minerals
Coal
Market cap(USD): 66,383.5M
Shares: 19,889.6M

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