Shares of Datang International Power Generation – the listed flagship of one of China's big five state backed power generation groups – dived as much as 14.5% after unveiling a deal to buy power plants – mostly loss-making – from its parent for 18.1 billion yuan ($2.7 billion).
The company has agreed to acquire three wholly-owned regional units in Hebei, Anhui and Heilongjiang provinces owned by parent China Datang Group, it said in a filing to the Hong Kong stock exchange late on December 6.
Its shares closed the morning session down 11.6 per cent at HK$2.2 - an eight-month low, after fetching as low as HK$2.13.
"Investors are reacting this way because the deal will add further losses to the company in the short term, although the outlook in the longer term may be better," said Simon Powell, head of Asian utilities research at UBS.
"We think coal prices will eventually come down and potential mergers as part of Beijing's state enterprises reform could see more industry consolidation and efficiency improvements."
The acquisition followed Datang International's disposal in June last year of a massive loss-making portfolio of coal conversion projects to its parent for a token price of one yuan, to refocus on power generation.
Its diversification into projects involving tens of billion of yuan of investment that turn coal into chemicals and natural gas resulted in years of big losses and asset writedowns, largely because of technical challenges.
Comprising both coal-fired and renewable energy units, the plants Datang International will be buying have a combined generating capacity of 13 GW.
They would significantly boost the generating capacity of the firm, which had 47 GW of capacity - of which 33.6 GW were coal-fired units – under its management at the end of June.
Amid surging coal prices and lagging power price increases, they posted a combined net loss of 505 million yuan in this year's first nine months, compared to a profit of 1.87 billion yuan for the whole of last year and 2.67 billion yuan in 2015.
Their combined net asset value amounted to 11.7 billion yuan.
Datang International said the valuations of the Anhui unit, as well as some subsidiaries of the Heilongjiang and Anhui units, were more than double their net asset value.
Six such units were required to provide profit forecasts for the purpose of the transaction under mainland listing rules.
They are projected to post a combined net loss of 864 million yuan for this year, and a loss of 60.5 million yuan for next year, the filing said.
The acquisition deal is subject to approval by Datang International's independent shareholders.
(Writing by Tammy Yang Editing by Harry Huo)
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