China Resources Utility Units in Possible Combination Talks

China Resources (Holdings) Co. is looking to combine two of its Hong Kong-traded utility units, amid a shift from coal-fired power.

China Resources Power Holdings Co., an electricity generator, and China Resources Gas Group Ltd., a natural gas distributor, are in talks to form an integrated energy group under their parent, the two subsidiaries said in separate statements to the Hong Kong Stock Exchange today. Neither company provided details of their discussion nor a time line for the negotiations. Their shares were suspended pending an announcement.

China Resources Power, 64 percent owned by China Resources (Holdings) according to its annual report, largely relies on coal for electricity generation. Its parent may see as inevitable a shift to cleaner fuels such as natural gas, after the government stepped up its campaign to fight air pollution, according to Shi Yan, an analyst at UOB-Kay Hian Ltd. in Shanghai.

“It’s a trend that major coal-fired power plants have to gradually shift to natural gas to meet higher environmental standards imposed by the government, and the merger is designed to serve that target,” Shi said.

China Resources Power’s market size is HK$121.2 billion ($15.6 billion), while China Resources Gas, also 64 percent owned by China Resources (Holdings) according to its annual report, is valued at HK$48.6 billion. The parent controls 11 listed companies in China, employs 400,000 workers, and made a profit of HK$41.1 billion on revenue of HK$405.7 billion in 2012, according to its website.

Highly Valued

With a price-to-earnings ratio of 22 times, China Resources Gas is more highly valued by investors because they view the company as a play on efforts to improve China’s energy mix and reduce pollution, Rajesh Panjwani, head of regional power research at CLSA Asia-Pacific Markets, said in an e-mailed research note. China Resources Power trades at a multiple of 12.

“Once combined with China Resources Power, the valuation premium attributable to the gas portion of the business is likely to shrink substantially,” Rajesh said.

China Resources Power gained 0.2 percent to HK$25.40 and China Resources Gas declined 0.2 percent to HK$21.85 on May 3, their last day of trade. China Resources Power has climbed 85 percent and China Resources Gas 44 percent in the past year, compared with a 10 percent rise for Hong Kong’s benchmark Hang Seng Index.

China Resources (Holdings) Co. did not answer two phone calls to its Hong Kong headquarters and did not respond to an e-mail seeking comment.

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