Why is electricity investment energy recommended at this time?

At the right time when aluminum prices are rising, the coal and electricity business is growing steadily, and the current undervaluation advantage is obvious. Since this year, due to falling coal prices in the market and stricter safety regulations, the performance of most coal companies has declined significantly year over year; however, with its stable coal prices, rising aluminum prices, and new installed facilities, power investment energy is expected to achieve a large positive increase in 24-year performance, highlighting its scarcity in the current market environment. Looking forward to the future, considering that the company still has the possibility of adding new scenery installed equipment and electrolytic aluminum production capacity, group assets or savings, the company's long-term growth is remarkable.

Coal: The gross margin is high, and the potential for epitaxial extension can be expected

The company is a leader in lignite, with a coal production capacity of 48 million tons and equity production capacity of 47.64 million tons. The calorific value is about 3,100 kcal, and the mining period is more than 30 years. According to traditional perception, due to its low calorific value and limited transportation radius, the price of tons of coal is not high, so the profitability of the coal business is often weak. However, the gross margin of the coal business of Power Investment Energy has been around 40-50% in recent years. Not only is it higher in absolute value than comparable companies, but its profit stability is also among comparable thermal coal companies. The reason for this is that coal price volatility is low (85% Changxie+tight supply and demand in Northeast China+stable customers) and the low cost per ton of coal (open pit mining+convenient transportation) are the core reasons for its high and stable gross margin. Looking ahead, we expect overall coal performance to remain steady. Looking at the long term, considering that the Group still has reserve production capacity, if asset injection is taken into account, the company's performance is expected to bring about a significant increase in performance.

Electricity: Thermal power is profitable, and new energy sources are growing steadily

As of '23, the company's total installed electricity capacity was 7.5 GW, including 3 GW for thermal power and 4.5 GW for wind power. In terms of thermal power, the 1.2 GW of the company Huolin River Kengkou Power Generation Company is the main unit of the Northeast Power Grid. Most of it uses its own coal, and the profit level is good; Huo Mei Hongjun's 1.8 GW thermal power unit is mainly used by the electrolytic aluminum plant and does not generate external profits. In terms of new energy, 3.2 GW of the company's 4.5GW new energy installed capacity is wind power, and about 1.3 GW is photovoltaics. However, since about 2 GW of new energy installations will not be connected to the grid until the end of 2023, the increase in performance is expected to be reflected in 24 years. According to the company's plan, the company plans to reach more than 7 GW of installed capacity by the end of '25, so the increase in installed capacity of Fengguang is still obvious. Looking ahead to 26 years, the company's power business performance is expected to reach 1-2 billion yuan.

Electrolytic aluminum: profit rebound is imminent, and production capacity can be expected to increase

The company currently has an electrolytic aluminum production capacity of 860,000 tons, an equity production capacity of 440,000 tons, and a production and sales rate of 100%. Considering the gradual recovery of the global industrial economy at the bottom, the production capacity of the electrolytic aluminum industry is limited, and the continuous increase in the contribution of new energy sources, we expect that the upward cycle of aluminum prices has just begun. The current extremely low inventory pattern can also easily amplify the elasticity of aluminum prices. At the same time, upstream aluminum raw materials are relatively weak due to supply and demand pattern constraints, and there is great room for improvement in the profit of tons of aluminum in the future. In terms of the company's electrolytic aluminum business, benefiting from its own power plant, the company's electricity costs are low; profit flexibility is high; in addition, considering that the company's 350,000 tons of electrolytic aluminum production capacity is currently undergoing preliminary work (51% equity ratio), the company's electrolytic aluminum business is expected to have high profit elasticity. Assuming that raw materials and energy costs remain stable, the price of aluminum without tax increases by 1,000 yuan, the company's annualized return to mother's performance will increase by about 350-400 million yuan, and the annualized return to mother's performance will increase by about 500-550 million yuan after the second phase of production is put into operation.

Investment advice

We expect the company's 2023-2025 EPS to be 1.88/2.31/2.66 yuan, respectively, and the corresponding PE will be 10.02/8.13/7.08 times, respectively, giving the company a “buy” rating.

Risk warning

1. The risk that aluminum prices are low; 2. The risk that climate absorption capacity falls short of the expected risk; 3. Risk of falling coal prices or the coal sector due to economic pressure or external factors; 4. Risk that the profit forecast does not meet the expected profit forecast assumptions or falls short of expectations