H1's net profit was 84 million yuan, in line with expectations. The company's performance successfully reversed losses in the first half of the year, reduced non-fuel costs, etc., led to an improvement in gross margin in the electricity sales business. Financial cost savings and high investment returns also contributed to a certain extent. The company has strengthened the development of the new energy market through “coal power+new energy”, etc., and has achieved remarkable results, creating new growth points for the company's performance. We updated our cost assumptions and raised our profit forecast for 2023-2025. The converted EPS was 0.21/0.38/0.43 yuan, respectively, and maintained the company's “buy” rating. The target price was 6.50 yuan.

1H23 achieved net profit of 84 million yuan to parent, and the performance was in line with expectations. In the first half of 2023, the company achieved operating income of 8.939 billion yuan, an increase of 1.06% year on year; realized net profit of 84 million yuan, reversing losses year on year; corresponding to EPS of 0.05 yuan; quarterly, Q2 achieved operating income of 3,588 million yuan, an increase of 4.98% year on year; net profit of 225 million yuan, reversing losses year on year.

The gross margin of electricity sales improved slightly, and the return on investment was outstanding. H1 achieved a power generation capacity of 19.566 billion kilowatt-hours, an increase of 2.37% year-on-year. The company's thermal power utilization hours increased slightly over the previous year; the H1 average feed-in electricity price was 399.39 yuan/megawatt-hour, an increase of 5.66 yuan/megawatt-hour over the previous year. Both volume and price increased slightly, driving a slight increase of 3.45% in electricity sales revenue in the first half of the year. The average unit price of standard coal in the first half of the year was 977.54 yuan/ton, a slight increase of 13.89 yuan/ton. H1's fuel cost increase was basically the same as the increase in electricity prices. Better non-fuel cost control led to a year-on-year increase in the company's gross business margin of about 1.5 percentage points. In terms of expenses during the period, the H1 financial expense ratio fell by 1 percentage point to 3.07%; furthermore, with the improvement in thermal power management, the company's H1 investment income rose to 175 million yuan. Financial cost savings and outstanding investment income performance contributed significantly to the year-on-year improvement in H1's performance.

The company's Q2 fuel cost pressure has clearly abated, and the release of elasticity in the second half of the year can be expected. The high price of incoming coal in the first half of the year was mainly hampered by the still tight supply and demand environment in the Q1 coal market. The price of standard coal entering the Q1 company was as high as 1,047 yuan/ton, combined with the average price of 978 yuan/ton in the first half of the year. Based on this, we speculate that the price of coal entering the company's Q2 furnace coal has dropped significantly. Since May of this year, as the supply and demand environment in the coal market continues to improve, domestic thermal coal prices have been clearly adjusted. Benefiting from changes in the fuel cost market environment, the company can be expected to release cost flexibility in the second half of the year.

Traditional thermal power is still increasing, and collaborative development is strengthening the expansion of the new energy market. In the traditional thermal power sector, the projects under construction, Shouyang Thermal Power and Yangquan Thermal Power, went smoothly. Among them, Shouyang Thermal Power Unit 1 passed the 168-hour trial operation on July 19; the company has obtained approval for the Xibaipo Power Plant Phase IV 1x660,000 kilowatt project and the Renqiu Thermal Power Phase II 2×350,000 kilowatt project. In terms of new energy, the company is adopting the “coal power+new energy” and “heat+new energy” collaborative development path to step up development efforts. As of 2023H1, 310,000 kilowatts of installed new energy have been put into production, and 720,000 kilowatts of additional registered capacity have been added to help the company transform and create new performance growth points.

Risk factors: fuel costs have risen sharply; market-traded electricity prices have dropped sharply; unit production has fallen short of expectations; electricity demand for the whole society has declined sharply.

Profit forecast, valuation and rating: Considering that coal prices in the market have declined markedly, adjusted the cost assumptions and raised the company's 2023-2025 EPS forecast by 7% to 36% to 0.21/0.38/0.43 yuan accordingly. The current stock price corresponding to PE is 29/16/14 times, respectively. Considering that the company has sufficient growth guarantees in traditional fields and is actively transitioning to new energy sources, referring to comparable companies (Huaneng International, Guodian Electric Power, Inner Mongolia Huadian), the market unanimously expects the average PB value in 2024 and gives a 10% valuation premium. The company is given 1.1 times the target PB in 2024. The corresponding target price is 6.5 yuan, maintaining the “buy” rating.