Key points of investment:

The first batch of pilot projects for state-owned enterprise reform received the most attention in Shanxi. The biggest point of interest: Currently, the 2015 PB valuation of companies such as SDIC Electric Power and Wenshan Electric Power, which are pilot state-owned enterprise reforms in the coal power sector, has more than tripled, and the company has been affected by the slow reform of state-owned enterprises in Shanxi, and valuations have not been raised. Since July, the provincial party committee secretary has mentioned the company's state-owned enterprise reform twice and conducted research, and the company's investment opportunities ignored by the market are probably just around the corner. In July 2015, Wang Rulin, secretary of the Shanxi Provincial Party Committee, said, “Tongcoal and Jinneng Group have deepened the reform pilot project and gained experience and carried it out throughout the province.” It requires solving the following problems: 1. Resolving the problems left over from resource integration; 2. Solving the unique problem of state-owned coal assets. Specifically, this includes the absence of a market-based mechanism for professional managers, subsidiary analysis by business owners, divestment of social functions, etc. On October 15, 2015, it was again pointed out that Jinneng Group is a pilot reform project, and they visited Jinneng Group specifically to investigate the situation. We believe that the progress of state-owned assets reform in Shanxi will not necessarily be the fastest, but after the state-owned enterprise reform plan is introduced, Shanxi will also gradually advance, and as a Shanxi enterprise with relatively poor operating efficiency, there will also be plenty of room for improvement in company profits.

Small companies and large groups have 5 times the high quality assets of listed companies. Jinneng Group, the majority shareholder of the company, owns 100% of Shanxi International Electric Power, while Shanxi International Electric Power holds 60% of Tongbao Energy's shares. In 2014, Jinneng Group achieved main business revenue of 191.4 billion yuan, with a total profit of 661 million yuan. It has two subsidiaries: 1. Coal Marketing Group. In 2014, coal production was 70.31 million tons, coal trade volume was 400 million tons, net profit - 1.5 billion yuan; 2. Shanxi International Electric Power. In 2014, equity installed capacity was 5.54 million kilowatts, power generation capacity was 12.51 billion kilowatt-hours, electricity sales volume was 6.84 billion kilowatt-hours, gas sales volume was 920 million cubic meters, and net profit was 1.5 billion yuan. The Group is developing 7.42 million kilowatts of power generation, 400,000 kilowatts of wind power, and 70,000 kilowatts of photovoltaics in 2015, and plans to acquire 200,000 kilowatts of wind power. Among them, Tongbao Energy's listed company installed only 1.28 million kilowatts in 2014, with a net profit of 560 million. The Group made a clear commitment to determine the company as the ultimate integration platform for the thermal power business and to give priority support to the company in power generation project development, capital operation, asset mergers and acquisitions, etc.

Profitability improvement opportunities from electricity reform. The company currently has three main businesses, power generation, distribution, and gas. Profits for the first half of 2015 were 115, 114, and -07 billion yuan respectively. Judging from the current electricity reform plan, due to the cross-subsidy problem of electricity prices, it is difficult to liberalize power generation and sales side prices in the short term. The company is expected to increase direct electricity purchases. According to the current average price of direct electricity purchased in Shanxi, which is about 0.05 yuan/degree lower than feed-in electricity prices of around 0.05 yuan/degree, the company's EPS is expected to increase by 0.04 yuan in 2016.

The company's EPS is expected to be 0.36 yuan, 0.48 yuan, and 0.52 yuan from 2015 to 2017, and the company will be given a target price of 10.65 yuan according to the segmental valuation. Since the parent company's electricity and gas assets are 5 times and 2 times that of listed companies, respectively, and are dragged down by coal assets, the group's capital is currently tight. Jinneng Group has always been one of the most important enterprises of the Shanxi Provincial Committee. The provincial party committee secretary has investigated the company several times. We believe that the company should have given a valuation higher than the industry average, according to the 2015 average PB1.7 times for thermal power assets, 2.5 times, and gas assets for thermal power generation, power grid, and gas assets were given 2.5 times, 3 times and 4 times, respectively, estimating the company's value by segments 11.3 billion yuan, corresponding to the stock price of 10.65 yuan, giving a purchase rating.

Risk warning: State-owned enterprise reform is progressing slower than expected.