|Yanzhou Coal Mining Company||2020||N/A||https://www.blackrock.com/corporate/literature/press-release/blk-vote-bulletin-yanzhou-coal-dec-2020.pdf|
We have communicated the above concerns with management and requested the company consider reporting
on its approach to the energy transition in alignment with the recommendations of the Task Force on Climate related Financial Disclosures (TCFD). BIS will continue to closely monitor Yanzhou Coal’s progress on
sustainability reporting and engage to advocate for business practices aligned with long-term value creation.
- to consider and approve Equity Interests and Assets Transfer Agreement between Yankuang Group Company Limited and Yanzhou Coal Mining Company Limited and to approve the transactions contemplated thereunder
BlackRock believes it is in our clients’ best long-term economic interests to vote against the proposed acquisition due to two primary concerns:
• The underlying valuation for the terms of the transaction; and
• Management’s oversight of potential stranded asset risks
We have concerns in respect to the transaction valuation and the underlying assumptions used. The proposed CNY 18.4 billion consideration represents 1.6x price to book (P/B) multiple based on the book value in the first half of 2020, which is mainly from the appreciation of coal mining rights upon revaluation. The underlying assumption of such revaluation, according to the meeting circular, is that the coal price in China would further increase from the current level and remain at that higher level until after 2023.
From a valuation methodology perspective, we find it questionable to project future coal prices by simply extrapolating historical price patterns. It also does not take into account the evolving coal market dynamics, including possible regulatory developments particularly regarding climate change mitigation and China’s aspiration to become carbon neutral by 2060. In fact, as noted by the third-party appraiser retained by Yanzhou Coal, should the coal price drop by 15% from the current projection levels, the value of the mining rights would decrease by 23.7%. This alone would reduce the valuation by CNY 2.3 billion.
The commitment on profit distribution and the earnings guarantee do little to address this concern. They are relatively short-term focused, and the guarantee amount covers just a small portion of the total consideration. More importantly, it does not recognize longer-term uncertainties in coal prices and demand that could have more significant implications for the value of these assets. Considering that Yanzhou Coal only trades at 0.5x P/B as a coal mining company, it is not clear whether paying three times more for coal related assets valued at 1.6x P/B could truly be value accretive for shareholders.
Moreover, we are cautious about the potential stranded asset risks at Yanzhou Coal following the asset purchase. The transaction was announced shortly after China pledged to achieve carbon neutrality by 2060 with carbon emissions peaking by 2030. Yet Yanzhou Coal as a state-owned enterprise did not articulate how the acquisition of these coal-related assets aligns with China’s stated goals, including the new Nationally Determined Contributions to be updated at the UN Climate Change Conference (COP 26).
In particular, concerns remain about Yanzhou Coal’s decision to acquire a coal-fired power plant as part of this transaction. The coal-fired power sector in China is already facing numerous challenges such as tightened emission standards, overcapacity, as well as declining utilization hours. The sector is expected to become even more challenged as more provinces anticipate grid parity for renewable energy. 6 Therefore, such an acquisition could well exacerbate the company’s stranded asset risks and delay progress to achieve the company’s decarbonization targets.