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Rating Action:

Moody's confirms Aa3 ratings of China Shenhua; outlook negative

 The document has been translated in other languages

13 May 2016

Hong Kong, May 13, 2016 -- Moody's Investors Service has confirmed the Aa3 issuer ratings of China Shenhua Energy Company Limited (China Shenhua).

Moody's has also confirmed the A1 rating of the USD notes issued by China Shenhua Overseas Capital Company Ltd. and irrevocably and unconditionally guaranteed by Shenhua Hong Kong Limited (Shenhua HK, unrated), a wholly owned subsidiary of China Shenhua.

The outlook on the ratings is negative.

This concludes the review for downgrade of China Shenhua's ratings announced on 17 February, 2016.

RATINGS RATIONALE

The confirmation of China Shenhua's rating reflects:

a) China Shenhua's resilient credit profile amidst weak coal prices. The resilience stems from its unique integrated business model, which includes sizable power generation,coal logistics and transportation businesses. The relatively stable profits from two of these businesses moderate the negative impact from the decline in the profits of its coal operations;

b) Relatively healthy leverage ratio,as measured by adjusted debt/EBITDA, of around 1.6x at end-2015 and expectations of around 2.0x for the next two years, but constrained by parent, China Shenhua Group Corporation's (Shenhua Group, unrated) higher leverage of around 3.7x in 2015;

c) Four notches of uplift -- resulting in the final Aa3 rating -- from our expectation of support from its parent and the Chinese government (Aa3, negative). The government support would flow indirectly via Shenhua Group.

The Group is of high importance to China's energy security due to: 1)its owning of a large amount of high quality coal reserves, 2) its large scale of operation as a key supplier of coal, and 3) its status as one of the largest power generation companies in terms of installed capacity, accounting for around 5-6% of total installed power generation capacity in China.

Additionally, Shenhua Group plays an important role in ensuring the timely supply of coal to key power plants through its integrated transportation and railway network. It also has been mandated by the government to build and manage a number of national level coal strategic reserve bases, which can counter supply shortages caused by natural disasters or market turmoil.

"In our view, the credit profiles of China Shenhua and Shenhua Group are closely linked as China Shenhua accounts for most of the group's revenues, profits and assets. There are also frequent asset transfers, as well as a high level of business integration and management overlap," says Joe Morrison, a Moody's Vice President and Senior Credit Officer, and also the International Lead Analyst for China Shenhua.

"China Shenhua's standalone credit profile incorporates our expectation that overcapacity in production will keep thermal coal prices low for a prolonged period and the government is also likely to further reduce power tariffs. Such developments will continue to pressure the profits and credit metrics of China Shenhua and Shenhua Group," says Kai Hu, a Moody's Senior Vice President and also the Local Market Analyst for China Shenhua.

Under our assumptions, China Shenhua's average coal price and average power tariff will decrease by 10% and 6% respectively in 2016 from 2015. We estimate that China Shenhua's adjusted debt/EBITDA will slightly rise to around 2x over the next 12 months.

Shenhua Group has weaker credit metrics than China Shenhua due to a higher debt burden at the holding company level and at other businesses outside of China Shenhua. We estimate that Shenhua Group's adjusted debt/EBITDA was around 3.7x at end-2015. The group's weak credit profile constrains China Shenhua's standalone credit strength in the current environment of low coal prices.

China Shenhua's liquidity position is strong. Its consolidated cash on hand of around RMB42.3 billion at end-2015 and projected cash flow from operations of RMB35-RMB40 billion in 2016 are sufficient to cover: 1) its capex spending of around RMB20 billion; 2) maturing short-term debt of RMB17.8 billion; and 3) estimated dividend payments of around RMB10 billion in 2016.

The negative ratings outlook reflects pressures on the standalone credit profiles of China Shenhua and Shenhua Group from industry overcapacity and low coal prices. It also reflects the negative rating outlook of the government and the potential for weaker-than-expected support from it over time, given the reform process in China and increasing evidence that both the central and local governments will gradually expect state-owned enterprises to continue operating in commercial areas without state support.

A return of the ratings outlook to stable could be considered if: 1) there is evidence of improvement in the coal market in China, and in turn, a strengthening of the standalone credit profiles of China Shenhua and Shenhua Group, and 2) the rating outlook for China returns to stable, and we believe that government support for Shenhua Group and indirectly for China Shenhua remains a priority and will not likely change despite ongoing reform.

Specific credit metrics that we would consider for a stable outlook include: 1) adjusted debt/EBITDA below 1.5-2.0x for China Shenhua and 3.5-4.0x for Shenhua Group.

A downgrade of China's sovereign rating will trigger a downgrade of China Shenhua's rating.

The rating could also come under downward pressure if: (1) there is a material deterioration in the company's performance, as a result of further sharp falls in coal prices, or adverse changes to power-sector regulations; and (2) the company demonstrates a more aggressive approach in capital spending, such that its financial profile weakens beyond expectation.

The credit metrics that we would consider for a downgrade include 1) adjusted debt/EBITDA above 2.5x for China Shenhua and/or 4.5x for Shenhua Group for a prolonged period.

China Shenhua's rating could also come under downward pressure if the support from its parent weakens, and/or the parent's own credit profile deteriorates materially.

The principal methodology used in these ratings was Global Mining Industry published in August 2014. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

China Shenhua Energy Company Limited is 73% owned by Shenhua Group Corporation Limited.

China Shenhua listed on the Hong Kong and Shanghai stock exchanges in 2005 and 2007. Its parent, Shenhua Group, is one of the 53 key enterprises directly owned and administered by the State-owned Assets Supervision and Administration Commission of the State Council.

Shenhua Group, 100% owned by the Chinese government, was established by the State Council in 1995 to build a strategic energy base for China.

The Local Market analyst for this rating is Kai Hu, +86 (21) 2057-4012.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.

Joe Morrison
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Gary Lau
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Moody's confirms Aa3 ratings of China Shenhua; outlook negative
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