2015 was a year where the fall of Chinese stocks and crude oil prices stole the limelight. Crude oil lost more than half of its value since the beginning of the year. This shocked the world and drove investors away from investing in the energy sector.
In general, the energy sector was shunned by many because of the decline in coal prices as well. The year 2015 ended with oil at barely over $40 per short ton. Overcapacity is a main reason behind the fall of both oil and coal prices.
But the reasons why are not important for the purposes of this article. The main thing we’re concerned about is that with current prices, consumption of these resources could jump again and bring the sector into better shape. This is possible due to reports that traditional power sources like coal, gas, and oil will still play a significant role in the world economy. This is the case even though there’s tremendous growth in the renewable energy sector.
With this discouraging news, many of the players in the sector saw their stock prices fall – possibly to the degree of being called undervalued. InvestAsian believes that China’s Shenhua Energy Company Limited (SHA:601088) is one of them.
Shenhua Stock: Invest in China’s Biggest Coal Company
Established in 2004 and listed in 2007, Shenhua is a world-leading coal-based energy company. Its main businesses are production and sales of coal, transportation of coal-related materials, and power generation. It’s also the largest coal supplier in China, and the vendor with the largest coal reserves. Shenhua prides itself on its model of large-scale, highly efficient, and safe production in the Chinese coal industry.
Shenhua is one of very few energy companies still making a profit, even though a bit less, in spite of recent events. Still expecting an impressive net profit margin of 15.6%, just a slight drop from last year’s 18.7%, the company is enduring hard times gracefully. It will seek to lead the recovery wave once oil prices recover.
It’s strong financial performance has given Shenhua among the energy industry’s best returns. Boasting a ROI and ROE of above 13%, it is leading the sector with the closest competitor at 11%.
Lowest P/E, Highest Dividends in the Energy Sector
In addition to giving its shareholders a great deal with its returns, Shenhua stock also has a P/E ratio of just above 8 and a dividend yield of 5.38%. These are both also the best in the Chinese coal industry.
Shenhua stock is a strong buy. It currently trades at only 13.75 CNY per share, a fraction of its former price which peaked at 25 CNY just a few months ago, Shenhua stock is a strong buy.
The recent opening of the Hong Kong-Shanghai Stock Connect lets individual foreign investors buy shares listed in mainland China for the first time. A brokerage account in Hong Kong is now more useful than ever. It gives access to all firms listed on the Shanghai Stock Exchange .
Interested in the Chinese stock market? Check out InvestAsian’s analysis of these two Chinese bank stocks.
UPDATE FOR 2017: Shenhua stock has nearly doubled since our recommendation last year. As of August 2017, it now stands at 22.30 CNY per share. We now rate Shenhua as a hold.
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