China Coal Energy Co's upcoming initial share sale could rekindle interest in coal stocks, with pundits hoping for a repeat of the dream debut by its larger rival China Shenhua Energy Co.

 

Last Friday, China's securities regulator approved a plan by the nation's No. 2 coal producer to float its yuan-denominated A shares on the Shanghai Stock Exchange.

 

China Coal's businesses include coal production, sales and trading, coke production and mining machinery manufacturing.

 

Analysts say still rising domestic coal prices and the fast growth in demand in China and India bode well for the sector.

 

In China, more than three quarters of electricity is generated from coal burning.

 

Shenhua's A shares skyrocketed 156.5 percent in the first five days after debuting in Shanghai in October, soaring to as high as 94.88 yuan (US$13.1) from the IPO price of 36.99 yuan. Analysts attributed the surge to speculative buying. Shenhua closed yesterday at 62.8 yuan.

 

Many investors will be wary, however, given the example of oil giant PetroChina Co, which began Shanghai trading in November. PetroChina jumped to 48.62 yuan in its first trading day, up from the offer price of 16.7 yuan, but has since been declining. It currently quotes around 30 yuan.

 

"PetroChina did teach us a lesson, so we don't expect a very sharp rise could happen for China Coal even though the sector remains quite attractive," said an Orient Securities analyst.

 

China Coal increased coal output by 14.5 percent to 90.52 million tons in 2007. Shenhua's coal production rose 15.7 percent to 158 million tons last year.

 

China Coal, already listed in Hong Kong, plans to issue no more than 1.525 billion A shares, or 11.51 percent of its enlarged share capital. It has yet to give a price range or a date for the IPO, although Chinese firms usually price mainland offers at a discount to the Hong Kong price and launch the IPO about two weeks after regulatory approval.

 

China Coal rose 3.72 percent yesterday to HK$22.3, based on which the Shanghai IPO would raise about HK$34 billion (US$4.36 billion).

 

China Coal said it would use 21.2 billion yuan of the proceeds to fund coal and chemicals projects in Inner Mongolia and Heilongjiang.

 

The firm said its 2007 net profit was no less than 6.01 billion yuan, citing international accounting standards, up 90 percent from a year earlier.

 

As well as its principal coal business, the firm's future profits are expected to be driven by coking coal, which is used to make steel.

 

"The firm's planned coal-to-chemicals projects, to come on stream in 2012, will also form a full industry chain for the company, reducing the effect of cyclic fluctuations in the coal industry," said China Merchants Securities (HK) analyst Shi Yu, who has set a target price of HK$30 for China Coal.

 

Key issues that could affect the Chinese coal firms include the fluctuation of coal prices and state adjustments in export quota and resource tax policy.

 

(Shanghai Daily January 18, 2008)