The broker said such a potential combination could be positive for CCE shareholders but would dilute Shenhua’s margins and returns with “net gearing nearly doubling”

“The backdrop to the recent merger noise is one of industry overcapacity and oversupply. Industry consolidation may help lift sentiment, but in our view, a potential combination of Shenhua and CCE might not bring about much change to industry dynamics,” JPM said in a client note last week.

“Given Shenhua's stated strategy to shift away from coal investments (only 14% of 2015 capital expenditure to be spent on coal), such a move would be surprising.”

Management of both companies were also unaware of any Chinese government plans to merge Shenhua and CCE.

“At JP Morgan’s China Summit in Beijing last week, both companies confirmed that they had not received any official directives and were unaware of such a proposal,” the broker said.

JPM further took the merger speculation boosts to Shenhua and CCE stocks last week as a selling opportunity.

“With coal markets remaining weak, albeit showing signs of bottoming (without much lift, in our view), we see the recent share price strength as an opportunity to take profits.”

Both coal companies are listed on the Hong Kong and Shanghai exchanges.