Wednesday, June 18, 2014

Seeking Alpha: China Shenhua Muddling Through Better Than Most

Six months ago I was pretty down on Yanzhou Coal (YZC), as I didn't like the company's asset mix or cost structure relative to other Chinese coal companies like China Shenhua Energy (OTCPK:CSUAY) or Indonesia's PT Bukit Asam (OTCPK:TBNGY). Since mid-December, Yanzhou's ADRs have fallen more than 13%, while Shenhua's shares have fallen about 7% and Bukit Asam's have risen about 5%. In that time, coal markets really haven't improved much as supply continues to stay well ahead of demand and producers are loath to close capacity.

Not all coal companies are the same, though, and this could be a reasonable time to consider China Shenhua. The company has large thermal coal reserves, but also highly integrated coal-fired power generation and railway assets. Though I'm not expecting a fast turnaround in Chinese coal prices, Yanzhou has one of the best cost structures in the business and its parent company could inject addition value-creating assets into the business. At a somewhat distressed multiple of 6x EBITDA these shares offer a decent total return, while a more normalized 7x multiple would offer a good return.

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China Shenhua Muddling Through Better Than Most

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