Main points of investment:
With the growth of energy-saving business, the provision for bad debts of receivables has increased, affecting net profit. Fuling Electric Power released the mid-year report in 2020, the operating income of H1 in 2020 was 1.2 billion yuan, which was the same as the same period last year, and the net profit was 160 million yuan, YOY-19%. The decline in net profit is mainly due to the increase in income from energy-saving services receivable and the provision for bad debts in accordance with accounting policies, resulting in an increase of 30 million yuan in credit impairment losses. In 2020, the accounts receivable of H1 company doubled to 600 million yuan compared with the same period last year, corresponding to 5% of the provision, and the provision for bad debts of accounts receivable was 30 million yuan. We believe that the increase in energy-saving income is mainly due to new energy-saving projects (Henan Phase II and Hubei projects), most of which will be recovered by the end of the past three years. We believe that the company's total revenue is flat with the increase in energy-saving revenue, which may be due to a decline in the distribution business affected by the epidemic in the first half of the year, considering that the energy-saving business still grew in the second half of the year, while electricity consumption has begun to recover, the company's H2 performance may be better than H1.
It is proposed to inject energy-saving assets into the distribution network and the valuation is reasonable. The company announced on August 14 that the capital to be raised is no more than 1.88 billion yuan, which, after deducting the issuance expenses, is mainly used to acquire the energy-saving assets of the distribution network and related EMC contract rights and obligations of the provincial comprehensive energy service companies under the jurisdiction of the State Grid, while replenishing working capital and repaying bank loans. Among them, 9 energy-saving assets are injected, valued at 1.322 billion yuan, and the simulated net profit in 2019 is 107 million yuan, corresponding to the PE valuation of 12 times, which is lower than the 23 times PE (TTM) valuation of listed companies on August 21.
The energy-saving business space of the national network is huge. The State Grid sold more than 4 trillion kilowatt hours of electricity in 2019, and its line loss rate is about 6%, that is, the annual power loss is more than 2400 billion kWh. According to the experience summary in the company's 2016 acquisition report: the medium and low distribution networks account for 50% of the network loss, and the energy saving of the distribution network can save 30% of the line loss, then the energy saving transformation of the distribution network under the State Grid can save 36 billion kWh / year. Considering that part of the distribution network has been transformed and may transform itself in the future, we conservatively assume that 30% of the distribution network in the national network area will be transformed by Fuling Power, that is, a power saving space of 108-180 billion kWh / year. The energy-saving business of Fuling Electric Power Distribution Network saves about 2.3 billion kilowatt-hours in 2019, and the total annual power saving of Shandong and Gansu projects that the contract expires is 280 million kilowatt-hours, then the remaining incremental market is 82-15.4 billion kilowatt-hours per year, which is 3.6-6.7 times more than that of Fuling Electric Power in 2019.
Profit forecast and valuation. We estimate that the company will achieve a return net profit of 4.29,4.61 and 496 million yuan in 2020-22, with a corresponding EPS of 0.98,1.05,1.13 yuan per share. With reference to the valuation of the comparable company, and considering the unique advantages of the company as the only power distribution and energy-saving business platform under the State Grid, the company is given 20-25 times PE in 2020, corresponding to a reasonable value range of 19.6-24.5 yuan per share.
Risk hint. The main results are as follows: (1) the distribution network energy-saving business has a high degree of customer concentration and high dependence on the national network. (2) the competition in the field of integrated energy services is intensified, and the company's gross profit margin is likely to decline. (3) the uncertainty of the asset injection process.