Incidents:
The company issued plans to issue shares and pay cash to purchase assets and raise supporting funds and related transactions. The company plans to issue shares to the National Energy Group and pay cash to purchase 100% of its shares in Hubei Electric Power. It plans to raise supporting capital through a non-public offering of common shares. The total amount raised will not exceed 1.6 billion yuan.
Key investment points:
Hubei Electric Power Company installed 3.423 million kilowatts of capacity, doubling the size of the company after the injection was completed. The total installed capacity of Hubei Electric Power to be acquired by the company this time is 3.4923 million kilowatts, which is comparable to the current controllable total installed capacity of listed companies (3.6943 million kilowatts). Hubei Electric Power includes Hanchuan Power (2*1 million kilowatts), Qingchuan Thermal Power (2*350,000 kilowatts), Enshi Hydropower, Zhuxi Hydropower, and Wuhan Fuel Company. Previously, the company had long been entrusted by the Group to manage its electricity assets in Hubei, and implemented the “one team, two brands, unified management, separate accounting” management model. The group paid the company 900-11 million yuan in management fees every year. This asset integration is conducive to resolving competition between companies and groups in the industry.
The issue price is 3.77 yuan/share, and the asset value is still being evaluated. The company announced that the current issue price is 3.77 yuan/share, not less than 90% of the average trading price for the 20 trading days before the pricing benchmark date, and no less than the net asset value per share for the most recent year. Currently, the total asset purchase price is still under further evaluation. According to unaudited financial data disclosed by the company, Hubei Electric Power's net assets at the end of 2019 were 4.725 billion yuan, operating income in 2019 was 5.909 billion yuan, and net profit from the mother's parent was 358 million yuan. The ROE calculated from this is 7.58%. Hubei Electric Power's ROE in 2018 was only 1.65%, and profit improved significantly in 2019.
It is expected that the benefits of the Haoji Railway will continue to be evident, and the performance of the Hanchuan Power Generation One Million Unit is expected to gradually be released. Since coal supply-side reforms, thermal power in central China has become one of the worst damaged regions in the country, mainly due to high prices due to poor coal transportation. The entire Haoji Railway line opened in September 2019. Although the decline in coal prices in Hubei Province has not increased significantly from the national average due to factors such as the short opening time, we estimate that transportation costs can be reduced by 60-80 yuan/ton through the Haoji Railway transportation compared to the sea-to-river method. In the long run, the Haoji Railway is expected to completely improve the coal supply and demand pattern in central China. Among the assets that the company plans to inject this time are two million-kilowatt units. Although the ROE of assets injected is lower than the company's existing assets in terms of profitability in 2019, in terms of installed capacity structure, Hubei Electric Power is relatively superior. We judge that under the double benefits of the declining cycle of coal prices and the operation of the Haoji Railway, it is expected that the advantages of Hanchuanfa's large units will gradually become prominent.
Profit Forecast and Valuation: Without considering this acquisition, we maintain our forecast of the company's net profit of $4.55, 9.04, and $954 million in 2020-2022. The PE corresponding to the current stock price is 10, 5, and 5 times, respectively. Although the epidemic in Hubei Province has put pressure on the company's performance in 2020, we still emphasize that in the long run, the company is the most certain target for Haoji Railway to start production. The company and Shenhua Group belong to the same National Energy Group. The existing power plant and the thermal power assets to be injected are all close to the Haoji Railway. It is expected to be the first to enjoy the dividends brought about by lower freight rates and maintain the “buy” rating.
