SDIC's new set of 2.8 billion purchase of major shareholders coal assets

After being suspended for over three months, SDIC Xinji (stock code: 601918), which closed at 5.32 yuan per share, has finally released its latest announcement today. The company unveiled a plan to issue shares to acquire assets and raise matching funds, with the goal of purchasing 100% of the equity in SDIC Coal Co., Ltd. from its major shareholder. The estimated value of the underlying assets is around RMB 2.8 billion, aiming to eliminate potential industry competition. On August 22, SDIC Xinji signed an "Asset Purchase Framework Agreement" with SDIC, planning to issue shares to acquire the 100% equity in SDIC Coal. The estimated asset value is approximately 2.836 billion yuan. The base price for the share issuance was initially set at 7.94 yuan per share, later adjusted to 5.60 yuan after the ex-dividend, representing a 5% premium over the previous closing price. Based on this, the non-public offering would involve approximately 506 million shares. In addition, SDIC Xinji will also raise matching funds through a non-public offering, targeting no more than 10 qualified investors other than the transaction party. The total amount raised will not exceed 25% of the total transaction value, with the same issue price of 5.60 yuan per share. The raised funds are intended to enhance liquidity and improve transaction efficiency. Before the transaction, SDIC Xinji mainly operated the Liuzhuang Coal Mine, with operations concentrated in Anhui Province. Post-acquisition, four subsidiaries under SDIC Coal—SDIC Datong, SDIC Xiyang, Zhengzhou Energy, and SDIC Xineng (non-controlling)—will be integrated into SDIC Xinji. These companies operate in key coal-producing regions like Shanxi and Henan, with combined coal production of about 7.5 million tons in 2012. This acquisition will significantly expand SDIC Xinji’s business scale, transforming it into a national coal mining, processing, and sales enterprise. However, the ongoing decline in coal prices poses challenges. As subsidiaries of SDIC, both SDIC Coal and SDIC Xinji may face competitive pressures. Although SDIC had previously promised to avoid conflicts of interest, the expansion of SDIC Xinji’s operations could lead to future competition. The announcement also revealed that SDIC is committed to injecting or transferring control of its non-listed coal assets into SDIC Xinji, either through injection, transfer, cancellation, or sale. Additionally, SDIC Xinji has been granted the right to purchase coal assets from SDIC. Despite these moves, concerns remain about the profitability of the acquired assets, given the continued drop in coal prices. For instance, the Qinhuangdao Port 5,500 kcal thermal coal price fell from around 800 yuan per ton in early 2012 to 560 yuan per ton. As both SDIC and the target company are heavily involved in thermal coal mining and sales, their profits are highly sensitive to price fluctuations. In Q1 2013, SDIC’s net profit dropped by 82.59%. If coal prices continue to fall, it could severely impact the profitability of SDIC Xinji and the newly injected assets. While SDIC has made compensation commitments, specific details are yet to be disclosed.

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