The profit of integrated coal and electricity companies declined slightly in '21. The main business of Huaihe Energy (Group) Co., Ltd. is a railway transportation business, coal trading business, and electric power business. The railway transportation business is the company's main source of profit. According to the 2021 mid-year report data, the company's trade logistics business provides 70% of operating income, but the gross profit accounts for only about 12%. The company's main source of profit is the railway transportation business, which accounts for 41% of gross profit, followed by the coal business, which accounts for 27%, and the power business accounts for only 6% of gross profit. According to the announcement, the company achieved net profit attributable to shareholders of listed companies in 2021 to 414 million yuan to 444 million yuan, a year-on-year decrease of 31.7 million yuan to 61.7 million yuan, a year-on-year decrease of 6.67% to 12.98%. The main reason for the decline in performance was that the price of thermal coal rose too fast in 2021, and the cost of coal-fired power plants increased, leading to a decline in the performance of the power generation sector.
Huainan Mining plans to go public as a whole, and the profits of listed companies are expected to increase. Huainan Mining Group is the leader in coal and electricity integration in East China. It is one of 13 large-scale coal bases and 6 large-scale coal power bases in China. At the end of March 2021, the company consolidated assets totaled 132,231 billion yuan, owners' equity of 34.665 billion yuan (including minority shareholders' equity of 115.25 billion yuan). The asset scale was huge. The net profit attributable to the parent company's shareholders was 2,966 billion yuan, an increase of 22% over the previous year. The profit was far higher than that of listed companies. According to the Huainan mining bond collection, as of the end of March 2021, the Group's approved production capacity in production mines was 76.1 million tons/year, including 9 of its headquarters mines, with an approved production capacity of 56.1 million tons/year, and 3 of the Ordos mines in Mengxi, with an approved production capacity of 20 million tons. Considering that the Ding Concentrate Mine (6 million tons) has already been injected into the listing platform, it is estimated that 70.1 million tons of coal mine production capacity will be injected this time. After the asset injection is completed, the scale of coal production capacity of listed companies may increase by 1168.33%.
By the end of March 2021, Huainan Mining Group had 24 controlled and shared 24 power plants, with a total installed capacity of 37.81 million kilowatts and an equity capacity of 16.73 million kilowatts. It is the power company with the largest equity and installed scale in Anhui Province. Considering that 2,5514,000 kilowatts are already in listed companies, the absorption and merger is expected to include 14.18 million kilowatts of equity installed capacity, increasing the installed capacity of listed companies by about 455.7%.
Coal prices are expected to remain high, and the profits of Huainan Mining Group are expected to continue. Investment in fixed assets in the coal industry continues to be low, which has led to a low rate of new construction production capacity in recent years. At the same time, “carbon peaks and carbon neutrality”
Against this background, the coal industry's willingness to build new production capacity has declined drastically. Even if the current mentality changes and starts to build new production capacity, considering the construction cycle of 4 to 5 years, the cycle for increasing production capacity is too long, so the coal industry is expected to maintain a high level of prosperity in the medium to long term, and prices are expected to remain high for a long time. On February 28, 2022, the “Notice on Accomplishing the Supervision of Medium- and Long-Term Coal Contracts in 2022” clearly stated that the standard price of the Long Term Association was 675 yuan/ton. Previously, the base price of the Long Term Association was 535 yuan/ton. The price center of the Changxie price center increased by 140 yuan/ton, an increase of 26%. Huainan Mining Group has many downstream power customers. The increase in the Changxie benchmark price will help Huainan Mining Group's comprehensive sales price increase. Huainan Mining Group's profit is expected to continue.
Investment advice: The company's net profit is expected to be 434 million yuan, 650 million yuan, and 828 million yuan from 2021 to 2023. The corresponding EPS is 0.11/0.17/0.21 yuan/share respectively, and the corresponding PE is 30/19/15 times (based on the stock price on March 11, 2022). Covered for the first time, giving it a “Cautious Recommendation” rating.
Risk warning: Risk of termination of absorption and merger of Huainan Mining Group; risk of loss in the power business.
