LEON COOPERMAN
CHAIRMAN AND CEO
OMEGA ADVISORS

MARK COOPER
PORTFOLIO MANAGER
OMEGA ADVISORS

STOCK: China Shenhua Energy
(Bloomberg/Reuters code: 1088.HK)
PRINCIPAL LISTING: Hong Kong Stock Exchange
PRICE: HK$9.90 ($US1.27) (as of 3 a.m. Eastern Time)
52-WEEK RANGE: HK$7.25-HK$10.20 (US$0.93-US$1.31)
MARKET CAPITALIZATION: HK$165.6 (US$21.2 billion)

Leon Cooperman is the chairman and CEO of Omega Advisors. Mark Cooper is a portfolio manager at Omega and an expert in the coal industry. China Shenhua Energy is the largest coal mining company in China, servicing one of the fastest growing economies in the world. Mr Cooperman and Mr. Cooper explain to David Dalley of The New York Sun why they believe Shenhua should be in every investor’s portfolio.

Why is Shenhua Energy such an exciting investment?

Think about all the manufactured goods you see for sale which say “Made in China” on the bottom. The Chinese manufacturing market is massive Those goods are made in factories and those factories have to be powered by electricity. Seventy-two percent of the electrical energy in China is produced by coal. That’s a lot of built-in, structural demand for coal products. Shenhua is the largest coal mining company in China with approximately 5% of the domestic market. It’s also the most efficient producer, with some of the lowest production costs around. That’s all pretty compelling.

They also have three other very strategic assets in rail, ports, and power plants. They own one of the two main rail lines (the other is state-owned) for shipping coal from the coal fields to the eastern utilities. They own their own port facilities for shipping coal both internationally and domestically (to southern China). So they don’t have to pay another company to transport for them. And they have ownership of six GWE of coal-fired electric power plants, which make them one of the largest power generation companies in China. This capacity will double by the end of 2007. China wants them to be a premier global energy company. They will probably be the no. 1 coal producer in the world by 2010, at over 250 mil lion tones. This isn’t some cheap over seas labor story – this is about a company with great assets and a region with incredibly strong demand for their product.

Why now? Hasn’t all this potential been factored into the stock price?

Not really. Shenhua is only the second Chinese coal company to IPO, and they only went public last summer. Already they’ve gone from $7 to $9 – that’s an increase of 30% in less than a year. The market is just beginning to recognize it. The stock had a new historic high on January 20.

People tend to believe that in a country like China, a place that historically hasn’t had Western investment, it’s wiser to wait and see how everything goes. As the country itself gains more credibility by delivering on its promises, that anxiety will fade. They’ve only reported one half year of earnings so far, and the full year results will be released shortly. We believe that people’s expectations are much too low, much too conservative. The profitability of this company is enormous. And as demand grows, which it will, they can raise prices even further. Their EBITDA margin is unheard of in the U.S. – it’s up at about 30%. It’s better than 3M, GE, or any mining company over here. Think about that. We believe that Shenhua is very undervalued right now.

What are the risks?

The main risk here is basically political. It’s about the Chinese government’s respect for capital. Russia expropriated investor capital back in 1998 and the question is whether the Chinese government respects the rule of law or is it just a roach motel. We’ve been led to believe, and we have every reason to believe, that they respect capital. Everything China has done for the last 25 years had led to a more open, capitalist society. They want and they need foreign investment. And they’re not stupid.

[Sections of this column were communicated via written correspondence.]