Morningstar analyst Zhao Hu says investors would be wise not to look at China Shenhua Energy Company Limited (HKG:1088) as only a coal story. Even if coal continues to underperform, Hu says China Shenhua’s other businesses will offset the negative impact.
“China Shenhua is a little bit different than the other pure-play coal companies we cover primarily because of its vertical integration strategy,” Hu says. “The company recognized the coal sector’s volatility and was able to expand upward and downward into different sectors that include railway transportation, power generation as well as some shipping and port operations.”
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Hu says China Shenhua’s earnings are only 50% leveraged to coal. The other half comes from non-coal businesses, which bodes well in the current environment, Hu says.
“For example, its rail will actually benefit from increased production of coal regardless of prices,” Hu says. “China Shenhua’s power business also benefits from lower coal prices because they use coal as their raw material.”