1. Plan for the worst, reduce costs to deal with the slump in the coal market. In the 2014 report, the company made the worst plans for 2015 profits, “striving not to lose money or keep losses within 500 million yuan.” The company strictly controlled the total number of employees, completed job adjustment arrangements for nearly 7,000 people, abolished 52 agencies, reduced the number of cadres by more than 400, adjusted the salary structure, and increased the share of income of frontline employees. Due to market pressure, the company's coal quality requirements for various units have increased, from simply focusing on production in the past to focusing on effective calorific value while at the same time carrying out deep processing of coal to reduce sulfur content to meet market needs. In 2014, the headquarters of Dayou Energy had already fallen into a loss. Relying on the profits of the holding subsidiaries, the entire consolidated statement remained profitable. Due to restrictions on coal quality and mining costs in the headquarters mine, the headquarters will endeavor to control the scale of losses in 2015. However, the key to determining whether the entire listed company of Dayou Energy will be profitable in 2015 depends on the profit performance of Tianjun Yihai Company, a wholly-owned subsidiary in Qinghai. 2. Tianjun Yihai's profit is expected to return to normal levels. As for the Tianjun Yihai market, focus on two factors: mining rights disputes and profit recovery. The 2015 report revealed, “On September 11, 2014, Muli Coal Industry Group signed an agreement with Tianjun Yihai to transfer resources and interests over mining rights to Tianjun Yihai. Currently, the specific transfer procedures are still being actively coordinated.” Although the mining rights have not yet been returned to Tianjun Yihai, the company's operations and profits are owned by listed companies. According to information disclosure on the Yihai Energy website, “Relevant information on the return of mining warrants in the first mining area of the Muli Mine has been submitted and is being actively resolved. Mining warrants in the second and third mining areas are being processed, and the production capacity of the Muli Mine and Big Coal Trench is being re-assessed. This will lay a solid foundation for next year and future enterprise development.” In 2014, Tianjun Yihai's operating income was 709 million yuan, while the net profit was only 74.14 million yuan, and the net profit margin was just over 10%. However, in 2013, Tianjun Yihai had operating income of 1.73 billion yuan and net profit of 565 million yuan. The net profit margin was much higher. Of course, the decline in coal prices may explain some problems, but it is not enough. In the second half of 2014, Tianjun Yihai actually stopped production in the second half of 2014. The reason is that Qinghai is carrying out ecological environment protection and management, and Tianjun Yihai has also invested a lot of money and energy in environmental management. According to the website, “The development of slope management work marks that the environmental management work of the Muli Mine has entered a brand new stage. This will lay a solid foundation for the Muli Mine to have production conditions and resume production as soon as possible, laying a solid foundation and winning initiative.” In view of the serious situation in the coal market, Qinghai “from May 1, payment of compensation for pristine mineral resources of 75 yuan per ton will be suspended. Based on actual annual production this year, enterprises can be reduced by 100 million yuan in expenses.” Deferred payment of compensation fees and a reduction in environmental management costs will push Tianjun Yihai's performance back to normal in 2015, so we expect that Dayou Energy will maintain a slight profit overall in 2015. (Source: http://www.yhnygs.com/userlist/yhgs/newshow-2813.html) 3. The only coal listing platform under the actual controller. The demand for securitization of extracorporeal coal assets is strong. The actual controller, Henan Energy & Chemical Group, has two listing platforms, Silver Pigeon Investment and Dayou Energy. Among them, Silver Pigeon Investment is proposed as the group's non-coal business listing platform, and Dayou Energy is the listing platform for the coal business. Dayou Energy's annual coal production is about 20 million tons, while Henan Energy & Chemical Group produced 106 million tons in 2013. The market is looking forward to subsequent asset injections. Investors are most concerned about the coal assets of Xiayongmei Company of the Henan Energy and Chemical Group. Yongmei Company has a large mine in Shangqiu, produces high-quality anthracite, has high sales prices, and is in the same coalfield as Shenhuo Co., Ltd., another listed company. Yongmei Company has recoverable reserves of 790 million tons in Shangqiu and an annual output of more than 16 million tons. It is the highest quality coal asset within the Henan Energy and Chemical Group. Even with the current sharp drop in coal market prices, the net profit per ton of coal is expected to still exceed 50 yuan, and the market is most looking forward to the injection of this part of the coal assets. 4. State-owned enterprise reform is worth looking forward to and is a potential catalyst. However, progress is slow. In October 2014, Henan Province identified pilot units for state-owned enterprise reform. The eight provincial management enterprises that undertook the first batch of reform pilot tasks were: Henan Energy & Chemical Group, China Pingmei Shenma Group, Angang Steel Group, Henan Investment Group, Henan Aviation Investment Group, Henan Aviation Investment Corporation, Zheng Coal Machinery Group, Luoyang Monocrystalline Silicon Group, and Henan State Control Group. Among them, three companies, Henan Energy and Chemical Group, China Pingmei Shenma Group, and Zheng Coal Machinery Group, are also undertaking the “testing of the waters” of market-based selection and recruitment of professional managers while piloting a mixed ownership economy. (Dahe Network: http://news.dahe.cn/2014/10-11/103592560.html;) Currently, pilot companies for state-owned enterprise reform are being promoted at an accelerated pace. In February 2015, Henan Province held a work conference on state-owned enterprise reform and state-owned assets supervision. Zhang Weining, vice-governor in charge of industry, “put forward new requirements for this year's state-owned enterprise reform and development and state-owned assets supervision work. Further measures should be taken to promote the stable and healthy development of enterprises, deepen reforms and comprehensively stimulate enterprise vitality, highlight innovation, accelerate the pace of transformation and restructuring, strengthen state-owned assets supervision, and deepen Promote the construction of a clean party style and government and the fight against corruption.” The Henan Provincial State-owned Assets Administration Commission, which is responsible for the specific execution of state-owned enterprise reform functions, has a more conservative attitude than other industries outside the province, is progressing slowly, and is unwilling to take greater risks. However, with the increasing number of reform cases from peers outside the province, this situation is expected to change. The Henan Provincial State-owned Assets Administration Commission will speed up its own reform work on the basis of drawing on its peers, as the general direction of state-owned enterprise reform will not change. We expect that the reform plan of the Henan Energy and Chemical Group will not bypass Dayou Energy, a coal listing platform. After all, coal is the core business of Henan Energy & Chemical Group. Compared with another listing platform, Silver Pigeon Investment, Dayou Energy has an advantage. The only drawback is that Dayou Energy is currently being investigated by the Securities Regulatory Commission due to information disclosure violations. 5. Profit forecasts and investment ratings combine factors such as coal sales prices and production costs. We forecast net profit attributable to the parent company in 2015-2017 to be 46 million yuan, 95 million yuan, and 195 million yuan respectively, corresponding to the 2015-2017 EPS of 0.02, 0.04 and 0.08 million yuan, calculated using the latest share capital of 2,391 million yuan, corresponding to 2015-2017 EPS of 0.02, 0.04 and 0.08 yuan. Profits are low, PE valuations are distorted, and there is no indicative effect. We use PB valuation. Dayou Energy is the coal asset platform of the Henan Energy and Chemical Group, and there is plenty of room for future use. At the same time, Henan Energy & Chemical Group is carrying out state-owned enterprise reforms, with huge potential dividends. Referring to Panjiang shares that have already been reformed by peers, its PB 2.8 times. We expect Dayou Energy's net assets per share to be 4.14 yuan in 2015, giving it 2.5 times PB and a target price of 10.35 yuan, maintaining the buying rating. Investment risk warning: coal prices continue to be low, production is safe.