China Resources Defends Shanxi Coal Mine Acquisition

The Chinese company accused of deliberately overpaying for three coal projects in 2010 defended the purchase after the claims wiped out almost $3.9 billion of market value in three days.

China Resources Power Holdings Co. said yesterday it paid a fair price for the assets in Shanxi province after getting two independent assessments. It hadn’t made the deal public because the company said its equity interest in the projects was below the disclosure threshold.

All five of the state-owned parent company’s units traded in Hong Kong plunged after allegations against it and Song Lin, the chairman of its parent company, were made public by the official Xinhua News Agency on July 17. Xi Jinping, who became China’s president in March, has pledged to investigate and clean up corruption at the highest levels of power.

“We believe it was a poor decision to make the investment in the Shanxi coal mines in 2010, as suggested by them not yet having commenced operations,” Pierre Lau, an analyst at Citigroup Inc., wrote in a note to clients dated today.

The defense came a day after Xinhua posted a letter written to the Communist Party’s corruption inspector by Wang Wenzhi, one of its reporters, alleging the power generator and the chairman of China Resources Holdings Co. paid about double what another company bid. Wang’s letter couldn’t be found on Xinhua’s official news website today. China Resources Holdings employs more than 400,000 people.

A group of minority investors said yesterday they filed a lawsuit in Hong Kong with similar allegations. They have no connection with Xinhua’s Wang, Li Su, founder of Hejun Vanguard Group, which is representing the investors, said at a briefing.

Beer Maker

China Resources Power plunged as much as 5.9 percent in Hong Kong today and was 3.6 percent lower as of 2:43 p.m. China Resources Land Ltd. fell as much as 2.7 percent, China Resources Gas Group Ltd. dropped as much as 2.1 percent, China Resources Cement Holdings Ltd. declined as much as 4.2 percent and China Resources Enterprise Ltd. fell as much as 2.4 percent.

The controversy surrounding the purchase of the mines may help derail a plan for China Resources Power and China Resources gas to merge. The plan, announced in May, would create a more integrated energy company and the combined company would have a total value of $16 billion based on yesterday’s closing price. The merger has yet to receive approval from shareholders, who will vote on the proposal on July 22.

Offer Remains

“The company has not changed the offer,” a China Resources Power media official said by telephone today from its Shenzhen Headquarters, declining to give her name, citing company policies. “The company will keep investors posted if anything happens.”

China Resources Holdings controls businesses spanning power generation, cement production, real estate and finance. Unit China Resources Enterprise produces the country’s best-selling brand of beer with SABMiller Plc. In 2012, China Resources Holdings had HK$41.2 billion ($5.3 billion) of profit on HK$404.6 billion of sales, according to its website.

China Resources Power said in a statement filed to Hong Kong’s stock exchange yesterday that the best interests of shareholders have always been its top priority and that it reserves the right to take legal action against any party that releases false or unsubstantiated information that jeopardizes its reputation. China Resources Holdings the night before issued a statement on its website calling reports that it overpaid for the mines “malicious.”

Positive Move

“It’s a positive move for the company to respond in a timely manner, otherwise the negative news could dominate talk and continue to drag down share prices,” said Shi Yan, an analyst at UOB-Kay Hian Ltd. in Shanghai. “Where the dispute goes next really depends on what new evidence will emerge from China Resources’ opponents.”

In his letter, Xinhua’s Wang alleged that Song and other executives deliberately overpaid. China Resources Power bought an 80 percent stake in the mines for 7.9 billion yuan ($1.3 billion), while another company had offered to pay 5.2 billion yuan for the entire asset a few months earlier, according to the letter, which was addressed to the Communist Party’s Central Commission for Discipline Inspection.

Party Corruption

The commission is responsible for investigating corruption and misconduct among Communist Party members. It operates a telephone hotline and a website where reports of misbehavior can be made. Song is a member of the party and was a delegate to the 18th Party Congress held in November.

In addition, Song also serves as an independent non-executive director for Geely Automobile Holdings Ltd. He has a bachelor’s degree in solid mechanics from Tongji University in Shanghai, joined China Resources in 1985 and was named a director in 1998, according to a profile on the company’s website.

Song told the South China Morning Post in a 2005 interview that his self-professed nickname was “the general manager killer,” because he had fired 10 division managers in seven years. He said he put “a lot of pressure” on division heads because the company’s businesses were labor intensive, making management of workers crucial. “We want a management team with younger managers, even more professional training and an even higher level of integrity,” he said, as cited by the Hong Kong-based newspaper.

People’s Daily Online, the website of the Communist Party’s official newspaper, reported yesterday that the discipline commission had received and was processing a report on allegations relating to China Resources. A spokesman for China Resources Holdings, who asked not to be identified because of the company’s rules, declined to comment on the report.

— With assistance by Henry Sanderson, and Guo Aibing

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