China Resources Power Plunges on Song Lin Probe

China Resources Power Holdings Co. plunged the most since 2008 after the nation’s anti-corruption agency said it’s investigating the former chairman of the company’s parent.

The listed unit of China Resources Holdings Co. fell as much as 12 percent in Hong Kong, leading a slump in shares of group companies after the probe into Song Lin was announced last week by the Communist Party’s Central Commission for Discipline Inspection. Song was removed from office, the official Xinhua News Agency said on April 19.

The probe into Song, 51, follows allegations in July that the company deliberately overpaid for three coal mines and signals an intensifying of President Xi Jinping’s campaign to root out corruption. China Resources Power may write down some of its 20 billion yuan ($3.2 billion) in coal mine investments after Song’s removal, Citi Research said.

Using language that typically denotes allegations of corruption, Song Lin is being probed for “suspected disciplinary violations,” the Communist Party’s Central Commission for Discipline Inspection said in a statement on its website April 17. China Resources Power will cooperate with the probe, the company said the same day.

China Resources Power fell as low as HK$18.50 on the first day of trade since the probe was announced, its steepest drop since Nov. 6, 2008, according to data compiled by Bloomberg. The stock closed at HK$18.98, while the city’s benchmark Hang Seng Index was 0.1 percent lower.

Beer Brand

State-owned China Resources Holdings employs more than 400,000 people and controls businesses spanning power generation, cement production, real estate and finance. Unit China Resources Enterprise Ltd., which produces the country’s best-selling brand of beer with SABMiller Plc., closed down 4.2 percent. Song’s investigation won’t have a materially adverse impact on its operations, the company said in a statement to the Hong Kong Stock Exchange.

In allegations posted on Xinhua’s website in July, Song and China Resources Power were accused of overpaying for three coal mines in Shanxi province bought in 2010. The claims prompted a government audit of the parent, according to Xinhua. Song and the company denied any wrongdoing.

Song Lin’s removal could prompt China Resources Power to write down the value of its coal mines including the assets bought in Shanxi, Citi Research said in a note dated yesterday.

Coal Writedown

“We estimate China Resources Power has 20 billion yuan of coal mine investments and estimate half of the coal mine investments are the poor-quality coal mines including 5 billion to 6 billion yuan in Shanxi and 4 billion to 5 billion yuan in Inner Mongolia,” Citi said.

A 10 billion yuan write-off would erase almost all of the company’s net profit estimated for 2014, it said.

Dave Dai, an analyst at Credit Suisse, said in a research note that the probe “could create some pressure on the stock in the near term,” although it’s unlikely to have a big impact on earnings at the company’s main power generating business. Dai downgraded the stock from outperform to neutral.

Qiao Shibo, general manager of the parent, was appointed by the Communist Party to take over Song Lin’s duties on April 18, according to a statement on the company’s website. In a speech posted to the site that day, Qiao called on employees to “stand firmly behind the decision made by the central government” and “try their best to maintain a normal and orderly situation.”

Power Threatened

Two calls to China Resources Holdings went unanswered today. An official at China Resources Power, who asked not to be named, said it has no comment on the Shanxi coal mine deals or other company matters.

The Song Lin probe is part of a Communist Party campaign to root out the corruption that President Xi Jinping has said threatens its six-decade hold on power. Party leaders have promised to target both “tigers and flies,” or cadres up and down the power ladder, over graft.

State-owned China National Petroleum Corp. came under scrutiny last year following a corruption probe that ensnared senior managers at its listed units PetroChina Co. and Kunlun Energy Co.

A journalist at a newspaper owned by Xinhua said April 16 that he had reported Song Lin to the anti-graft watchdog, according to the China Daily. Song called the accusations a fabrication on the company’s website the same day, a statement that was later retracted.

Song Lin isn’t the first to be investigated following allegations of wrongdoing in state media. The Communist Party fired a vice chairman of the economic planning agency last May after a journalist posted allegations that he had improper business dealings. More than 180,000 party officials were punished for corruption and abuse of power last year, according to the Discipline Inspection commission.

(Corrects Qiao Shibo’s name in 12th paragraph in story initially published on April 22.)
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