Aluminum prices continue to rise, and three-wheel drive space for “coal, aluminum, and electricity” opens up. The price of electrolytic aluminum in the domestic market continued to rise. As of April 10, aluminum ingots (Chinese market price) were 1,857 yuan/ton, +504 yuan/ton compared to last week, and +1,249 yuan/ton compared to the same period last year. The predecessor of Power Investment Energy, Huolinhe Mining Administration (formerly known as open-pit coal industry), is mainly engaged in the coal business. The main type of coal is lignite (average calorific value is 3100 kcal/kg), which has the advantages of low sulfur and low phosphorus. It is mainly sold to power plants in Northeast China, and has become a leading lignite enterprise in Mengdong and Northeast China. In 2014, the company acquired 100% of the Group's shares in Huolinhe Kengkou Power Generation to lay out the electricity business; in 2018, Power Investment Energy purchased 51% of Huo Meihongjun's shares (mainly engaged in the production and sale of electrolytic aluminum) to quickly lay out the electrolytic aluminum business and form a “coal+electricity+aluminum” linkage.

The high strength and resilience of the coal business is outstanding. 1) Resource endowment: The company has mining rights for the No. 1 open pit mine in the Huolin River Mining Area and the Zahannur open pit mine. As of the semi-annual report of 2023, the company's approved coal production capacity is 46 million tons, and the total production capacity of the Group's Baiyinhua No. 2 and No. 3 mines has been completed. In the future, it will continue to promote the injection of Baiyinhua No. 2 and No. 3 mines into listed companies to increase production capacity; 2) Sales structure: Coal Sales Association accounts for about 85% (according to the National Development and Reform Commission's “Notice on Further Coal Market Price Formation Mechanisms”》Changxie coal price range according to Mongdong 3,500 kcal of lignite is between 200 and 300 yuan/ton (tax included), accounting for about 15% of the coal market, supplying about 13 million tons of coal for the company's internal thermal power plants (about 28.3% of total production capacity). 3) Sales radius: The company's lignite is mainly sold to eastern Inner Mongolia, Liaoning Province and Jilin Province, and has become a leading lignite enterprise in eastern Mongolia and Northeast China. 4) The company's raw coal production in the first half of 2023 was 23.36 million tons, +4.16% year over year; in the first half of 2023, raw coal sales were 23.14 million tons, +3.67% year over year.

The low cost advantages of self-owned power plants in the electrolytic aluminum business are highlighted. 1) Production capacity: The company currently has an electrolytic aluminum production line with an annual output of 860,000 tons, all using the cryolite-alumina molten salt electrolysis method. The main raw materials required are alumina, carbon blocks and fluoride. Huomei Hongjunza Aluminum Phase II is carrying out preliminary work on a scale of 350,000 tons of electrolytic aluminum, which is expected to contribute to the increase in production capacity; 2) Cost advantages: The basic sources of electricity required for the company's electrolytic aluminum electrolytic aluminum are 1.8 million kilowatts of its own thermal power plant and 400,000 kilowatts of wind power. The internal power plant is the main entity of Huohong Coal's internal production unit; 3) Sales radius and structure: Aluminum liquid is mainly sold to surrounding aluminum processing companies, aluminum Ingot and various types of aluminum are mainly sold to Northeast China and North China; 4) The production of electrolytic aluminum in the first half of 2023 was 429,200 tons, -0.15% year-on-year, and the sales volume of electrolytic aluminum in the first half of 2023 was 430,700 tons, +0.01% year-on-year.

The electricity business “thermal power+new energy” went hand in hand. 1) Thermal power: The company currently has 3 million kilowatts of thermal power installed (including 1.8 million kilowatts of circular economy thermal power). The Tongliao Huolin River Kengkou power generation 2×600 MW unit is the main peak shaving unit for the Northeast Power Grid Direct Control Thermal Power Plant. 2) New energy: The company currently has about 4.5 million kilowatts of new energy power generation. The company plans that the installed scale of new energy will reach more than 10 million kilowatts by the end of the “14th Five-Year Plan”, becoming another support point for corporate profit growth. Currently, in addition to 1.05 million kilowatts of circular economy projects, the remaining 3.45 million kilowatts of installed capacity are connected to the Internet, and it has not been possible to add new energy power generation projects mainly above the grid. 3) In the first half of 2023, the company generated 445.71 million kilowatt-hours (including photovoltaics and wind power), +9% year-on-year; in the first half of 2023, the company sold 416.8.92 million kilowatt-hours of electricity (including photovoltaics and wind power), +13.3% year-on-year.

Investment advice. It has both growth and flexibility. The proportional resilience of the coal business is prominent, and further increases in superimposed production capacity can be expected. The electrolytic aluminum business is expected to benefit from the flexibility of performance during the upward phase of aluminum prices, and the three-wheel drive space for “coal, aluminum, and electricity” opens up. Considering the rise in aluminum prices exceeding expectations, we raised the company's performance forecast. We expect the company's net profit to be 4.5 billion yuan, 5.5 billion yuan, and 5.9 billion yuan respectively in 2023-2025, corresponding to PE 9.3, 7.5, and 7.1 billion yuan, respectively.

Risk warning: Asset injections fell short of expectations, aluminum prices fell sharply, and electricity generation fell short of expectations.