Seeking Alpha: China Shenhua Can Have Life After Coal

Every time it looks coal may be bottoming, somebody manages to bring out a shovel. Hopes that Chinese coal prices would bottom in the summer of 2014 around RMB 510/t proved too optimistic, as prices continued to make new lows and coal recently traded at around RMB 400/t before a slight rebound. Against that backdrop, the 17% decline in China Shenhua Energy's (OTCPK:CSUAY) share price since my last article isn't so surprising.

What is more surprising about China Shenhua Energy is the extent to which it has a life beyond coal. The company has immense marketable reserves and is the largest coal miner in China, but it generates more than half of its EBITDA from power and transportation operations and these businesses are likely to make up an increasing share of future earnings. These operations don't immunize Shenhua against an even longer stretch of weak coal pricing, but they do at least offer some worthwhile growth potential. Insofar as the shares go, the ongoing declines in global steel, base metal, coal, and other commodity stocks has been a rough lesson in the risk of reaching out to grab falling knives - I can say that these shares look more than 10% undervalued on a 5.5x multiple to 12-month EBITDA, but who's to say that there isn't another 10% downside to EBTIDA?

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China Shenhua Can Have Life After Coal

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

Seeking Alpha: High Costs And Leverage Make Yanzhou Coal A Risky Play On Chinese Coal

One way to sum up the general sentiment towards Yanzhou Coal (YZC) is to observe that the shares are down more than 15% over the past month while coal prices in China have increased by around 20%. There are reasons for more optimism about coal prices going into 2014, but Yanzhou's high production costs and high leverage make this a risky and volatile play on higher prices relative to peers like China Shenhua (OTCPK:CSUAY) or China Coal (OTCPK:CCOZY).

I can understand if Yanzhou jumps out as a contrarian play on coal given that generally negative sentiment on the stock. While I won't rule out the possibility that a rising tide of coal prices will lift this boat, I don't see enough undervaluation to compensate for the risks, nor the company's history of taking not-so-shareholder friendly actions.

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High Costs And Leverage Make Yanzhou Coal A Risky Play On Chinese Coal

Commodity HQ: A Deeper Look At China's Commodity Industry

Although the geographical size of China is perhaps not that difficult for North Americans to appreciate, their population is another matter. As China has become the second-largest economy in the world, it is without question transformed into an enormous force in the world’s commodity markets; so much so, in fact, that the recent commodity supercycle is now generally seen as a byproduct of China’s emergence.

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A Deeper Look At China's Commodity Industry