Datang + China Coal: The next trillion-dollar coal power giant?

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At the end of August, the merger between Shenhua and Guodian in the coal-fired power sector attracted a lot of attention. After the merger of these two giants, the **Energy Investment Group** (“**Energy Group**”) immediately took hold of three world records: the largest installed capacity, the largest wind power installation capacity, and the largest coal production capacity. In terms of installed capacity, **the energy group easily surpassed Huaneng (165.5 GW), reaching a total installed capacity of 225 GW and thus becoming the world’s leader; it far outdistanced European power giants such as EDF and Enel. In terms of wind power installation capacity, building on State Power’s previous position as the leader in this field, **Energy Group has raised its capacity to 33 GW, further solidifying its lead and leaving other power companies far behind. The former pattern of \"five large and four small\" enterprises has been redefined, triggering a wave of vertical integration in the coal power business among central state-owned enterprises. Meanwhile, the integration of Huaneng and Guodian Power has also been indirectly acknowledged by relevant parties; among the original \"five major power generation companies,\" only Huadian and Datang remain without a clear outcome. There were previous rumors of mergers and restructurings involving Datang, but nothing has come of them to date. At the beginning of this year, there were rumors that Huaneng, Guodian, and CNNC would be merged into one company. But now that Guodian has joined forces with Shenhua, Huaneng finds itself isolated, just like Datang. After Shenhua, the market’s attention turned to China Coal, the second-largest coal company among the central state-owned enterprises. Under the concept of integrated coal and power generation, is it possible for companies in the power generation sector such as Datang, Huadian, and China National Coal to collaborate? Vertical integration resolves the contradictions associated with coal-fired power generation; both Shenhua and Guodian have reaped significant benefits from this business integration. “The long-standing conflict between \"market coal\" and \"planned electricity\" seems to have been resolved through another approach. Shenhua’s asset structure, which is heavily focused on coal, will be diluted as a result of the restructuring with Guodian. According to the 2016 financial reports, Guodian’s renewable energy capacity amounted to 17.1 GW, accounting for approximately 33.7% of the company’s total installed capacity; these sources contributed nearly two-thirds of the company’s overall profits in 2016. After the merger, CNPC’s diversified power generation structure also helps to mitigate risks in the context of the \"market-based electricity\" system. Guodian has solved the biggest problem associated with thermal power generation, namely production costs, and since then it has said goodbye to the coal price risks that once posed such a challenge. In the first half of the year, Changyuan Power, a listed company under State Power Investment Corporation, also suffered losses due to high coal prices. According to the semi-annual report released by Changyuan Power, due to an increase in the price of standard coal by 328.12 yuan per ton on a year-on-year basis, fuel costs rose overall, resulting in a net loss of 90.155 million yuan for the company. The profit losses caused by rising coal prices amounted to approximately 670 million yuan. In Changyuan Power’s power generation structure, thermal power capacity accounts for over 98% of the company’s total installed capacity. http://img.yf116.cn/image/img/20170904/95117354773.jpg A win-win deal? Could China Coal Datang form a partnership? Since the vertical integration of coal power generation leads to a win-win situation, after Shenhua, the market’s attention turned to China National Coal Group, the second-largest coal company. Who could be the target for the merger and restructuring of China Coal? Apart from Huaneng and State Power Investment, which have been the subject of much speculation earlier on, the other two of the ‘Big Five’ power companies, Huadian and Datang, have become the focus of speculation. In the first half of this year, domestic coal prices rose by an average of 63%. According to the interim report for 2017 released by Datang Power Generation, a listed company under the Datang Group, the company’s total profit for that period was approximately RMB 1.782 billion, a decrease of 48.62% compared to the previous year ； The net profit attributable to the shareholders of the listed company was RMB 1.081 billion, a decrease of 36.19% on a year-on-year basis. Thermal power capacity accounts for nearly 3/4 of Datang Power’s asset portfolio. Recently, Bloomberg published an analyst report titled “Analysis and Outlook on Shenhua and China Coal” (hereinafter referred to as the “report”), stating that China is currently integrating the coal and power industries, which could lead to the merger of China Coal Group with a state-owned thermal power company. Datang Power, as one of China’s largest independent power generation companies, could be a potential target. The report also predicts that if the merger goes through, China Coal Group’s power generation and coal chemical industries will expand, and it will also acquire renewable energy operations, thereby diversifying its business portfolio. China Coal Group’s return on equity is set to increase from 2% in 2016. China Coal + Datang: Another trillion-dollar merger? After the merger of Shenhua and Guodian, the company’s total assets reached 1.8 trillion. If China Coal merges with Datang, it will become another coal power giant with a value of one trillion yuan. By the end of 2015, China Datang Group’s operational and under-construction assets were located in 31 provinces, autonomous regions, and municipalities across China, as well as in countries such as Myanmar, Cambodia, and Laos abroad. The total value of these assets amounted to 729.547 billion yuan, while the total installed power generation capacity was 127.1706 million kilowatts. According to the publicly available data from the 2016 Fortune 500 list, Datang Group’s total assets amounted to 112,348.6 million dollars. Using an exchange rate of 6.7 dollars per yuan, this corresponds to approximately 752,736 million yuan, representing an increase compared to the figures at the end of 2015. By the end of 2016, China Coal Group had 54 wholly-owned companies, holding companies, and jointly-owned subsidiaries, as well as 4 overseas entities, with a total asset value of 314.2 billion yuan. In April this year, China Coal Group took over Poly Energy, which focuses on coal, mineral, and trading activities; last year it acquired shares in SDIC Xinji, and it is regarded as a platform for the integration of coal-related businesses. According to Nengdou Jun’s calculations, after the merger of Datang and China Coal, the total asset value of these two groups will be around 1,066.9 billion yuan. By the end of 2016, Huaneng, which was the leading among the original five major power generation groups, had total assets of 1,002.9 billion yuan. In terms of the combined installed capacity, since most of the power plants owned by China Coal Group were either inherited or built through cooperative development methods, they contribute little to enhancing the strength of the resulting new giant. According to data published on the official website of China National Coal Group, the group currently owns or has stakes in 24 power plants, with a total installed capacity of 11.41 million kilowatts and an equity-installed capacity of 4.46 million kilowatts. By the end of 2015, Datang Group had an installed capacity of 127.17 million kilowatts.