Investors have been jittery about the prospect of Chinese coal companies ever since coal prices showed signs of peaking in the middle of this year, giving a lukewarm reception to the country's biggest coal producer China Shenhua Energy Co. soon after its market debut in Hong Kong in June.
But buying interest is beginning to rekindle as investors now see limited downside for coal prices. Prices are likely to be supported by two factors: diminishing supply after Beijing ordered the closure of small unsafe coal mines and China's insatiable appetite for energy to fuel its economic boom.
Shenhua Energy, in particular, will likely benefit from sustainable high coal prices and robust production volume growth.
The company, which derives a large chunk of its sales from coal, owns the world's No. 2 coal reserves and has exposures to power, rail and port assets. Many investors favor Shenhua Energy over its Hong Kong-listed rival Yanzhou Coal Mining Co. for the former's growth potential and favorable revenue mix.
"Shenhua Energy is a better buy than Yanzhou Coal due to slower output growth in the latter. Shenhua Energy has bigger growth potential," said Paul Pong, chief investment officer at Pegasus Fund Managers.
Shenhua Energy, which owns 5.9 billion tons of proved and probable reserves and operates 21 operating mines in western and northern China, expects production to rise by 47 percent to 149 million tons by 2007 from last year.
Shares of Shenhua Energy, which raised 25.5 billion Hong Kong dollars (US$3.3 billion) in a June IPO this year, have risen 14 percent since its IPO. But the stock has fallen nearly 4 percent from its peak early August.
Still, it has fared better than Yanzhou Coal, which has lost 14 percent over the same period because of its weak fundamentals, analysts said.
Of 17 analysts polled by Thomson Financial, 11 rate the stock a "buy", "outperform" or "accumulate," with the remainder rating it a "neutral" or "hold."
Pegasus' Pong, who bought Shenhua Energy shares during the IPO, said if Beijing decides to narrow the gap between domestic and international oil prices, it would turn users away from oil toward coal.
"I'm positive on China's coal industry, but the sector is somehow dependent on government policy. Coal prices are at their consolidation phase and they are unlikely to go up or down a great deal," Pong said.
If future policies prove favorable to the coal sector, Pong said he is ready to add more Shenhua Energy shares to his portfolio.
China, the world's largest coal market by annual production and consumption, saw coal prices peak in the middle of 2005 but the decline since then, say analysts, has been due to seasonal inventory buildup and looks set to be temporary.
Qinghuangdao, China's largest trading coal center, saw a 2.2 percent to 4.6 percent fall in coal prices in the three months to mid-September from the second quarter. But prices were still about 15 percent higher than those in the third-quarter last year, AP reported.