Incidents:

The company published its 2019 annual report and 2020 quarterly report. In 2019, the company achieved revenue of 15.811 billion yuan, an increase of 28.5% over the previous year, and realized net profit of 1,499 million yuan, down 17.25% from the previous year, lower than the 2.111 billion yuan forecast for Shenwan Hongyuan in the third quarter report. In the first quarter of 2020, the company achieved revenue of 3.698 billion yuan, an increase of 0.04% over the previous year, and realized net profit of 453 million yuan, an increase of 13.07% over the previous year, in line with Shenwan Hongyuan's expectations.

Key investment points:

The Qingjiang River Basin had the driest incoming water history in 2019, with significant improvements in the first quarter of 2020. The water in the Qingjiang River Basin has continued to fall short of expectations since 2019. The company's annual hydropower generation capacity decreased by 14.52% year on year, while the water in the Qingjiang River Basin in 2018 was significantly lower than the historical average. In that year, the hydropower generation capacity decreased by 29.93% year on year. According to the company's annual report, the water situation in the Qingjiang River Basin has been the driest in history since 2019. Hydropower generation in 2019 was less than 60% of what it was in 2017 (big year of incoming water). Incoming water from the Qingjiang River Basin has improved dramatically since the beginning of 2020. The company's hydropower generation capacity in the first quarter of 2020 increased by 63.89% year-on-year, and the absolute amount has already exceeded 1/3 of the total power generation in 2019. The increase in hydropower generation capacity was the main reason for the recovery in the company's performance in the first quarter. According to the annual pattern of incoming water, hydropower performance is expected to improve significantly throughout the year.

Ezhou Phase III was put into operation+water, fire, and seesaw effect. In 2019, thermal power generation increased dramatically, and the number of hours used dropped significantly in the first quarter of 2020. The company put into operation two million-kilowatt units of Ezhou Phase III in 2019. The installed capacity of thermal power increased to 4.33 million kilowatts. Affected by the high increase in electricity demand and the sharp decline in hydropower generation in Hubei Province, the average number of hours of thermal power utilization in Hubei Province in 2019 increased 269 hours year-on-year, and the company's annual thermal power generation capacity increased 69.68% year-on-year. Since the beginning of 2020, due to the epidemic in Hubei Province and improvements in incoming water, the company's installed capacity nearly doubled year-on-year in the first quarter. Thermal power generation capacity fell 3.01% year on year, and the number of hours used almost fell short. However, judging from the income statement, the company holds 100% of the shares in Qingjiang Company, and its thermal power, coal trading and natural gas business subsidiaries are not wholly owned. The company's minority shareholders' profit and loss for the first quarter of 2020 was 115 million yuan, far higher than the 068 million yuan in the same period in 2019. From this, it is inferred that the company's non-hydropower business still achieved positive performance growth in the first quarter of this year.

The short-term situation does not change the long-term high growth in electricity demand in Hubei Province, and the Haoji Railway is expected to bring about marginal improvements on the cost side. In recent years, Central China, represented by Hubei Province, has benefited from the development of high-end manufacturing industries, and electricity demand continues to lead the country. We judge that the short-term epidemic will not change the long-term growth trend, and electricity demand in Hubei Province is expected to gradually recover in the future. From the cost side of coal and electricity, the Haoji Railway was successfully put into operation in October 2019. The pattern of coal supply and demand in central China is expected to be completely reshaped, and the subsequent decline in coal prices is expected to be greater than the national average. In addition, the company and Haoji Railway will simultaneously build a Jingzhou coal, iron and water intermodal transportation and storage base. Jingzhou will build a coal, electricity and coal chemical industrial park. Downstream demand is strong. The company predicts that the annual net profit of the storage and distribution base will reach 200 million yuan after delivery, which can provide an additional increase in profit.

Profit forecast and valuation: Taking into account the incoming demand situation and thermal power performance, we lowered the company's net profit forecast for the year 2020-2021 to 25.06 billion yuan and 2,779 million yuan respectively (2,991 billion yuan and 3.132 billion yuan before adjustment, respectively), adding the 2022 forecast to 3.142 billion yuan. The current stock price corresponds to PE 9, 9, and 8 times, respectively. We judge that the company's current valuation level has both reflected a weakness, and that subsequent performance will continue to improve and maintain the “buy” rating.