Stable profits+high dividends, backed by Huainan Mining. Companies with large development potential are Huainan Mining's “coal electricity+railway” platform, fully benefiting from Anhui Province's economic development and rapid growth in energy demand. The company's dividend rate in 2023 is 55%. We believe it is expected to remain stable in the future, and the possibility of improvement is not ruled out, because the capital expenses of listed companies are limited, and all new power plants are injected after the group is built (with industry competition promises); asset injection was completed the year Panji Power Plant was put into operation in 2023, and the target valuation was PB1.0x in 2023. We forecast net profit of 10/11/1.2 billion for 2024-26, and P/B 1.2/1.1x for listed companies 2024/25. Comparable integrated coal and electricity companies had an average PB of 1.6/1.5x in 2024/25. Considering that the company's ROE is slightly lower than that of comparable companies, the 2024 target PB1.5x was given, covering the target price of 4.3 yuan for the first time, and a “buy” rating.

The profitability of “coal electricity+railway” is steady. The small “Shenhua” listed company in Anhui has gone through many asset restructuring and is now the energy platform for Huainan Mining Group. Its main business covers logistics trade, electricity, coal sales, and railway transportation. The gross profit contribution in 2023 was 8%/33%/28%/24%, respectively. As of 2023, the company has wholly-owned 3 Kengkou power plants using comprehensive resources, 2 joint ventures with Shanghai Electric Power Company and supporting coal mines. In addition to the newly injected Panji power plant, the company's equity installed capacity is 3.6 GW. The advantages of coal-power joint ventures are remarkable (fuel procurement comes from listed companies or coal mines owned by the group). In addition, the company undertook railway transportation business for the Group's coal, mainly from coal mines produced in the Group's Huainan mining area; it participated in leading port operators in Anhui Province. In 2023, “coal and electricity” and “logistics” accounted for 56%/44% of the company's net profit to mother, respectively.

The parent company, Huainan Mining, is the leading coal power company in Anhui. The asset injection model is similar to “Changjiang Electric Power”. As of 2022, Huainan Mining is the largest installed company with coal production capacity and power equity in Anhui. It has an approved coal production capacity of 77.9 million tons/year, 43.65 million kilowatts of electricity installed, and 21.45 million kilowatts of equity. By the end of 2023, the company controlled and participated in 4.91 million kilowatts of installed power plants and 3.57 million kilowatts of equity. The Group publicly promised in 2016 that projects built since then with similar business to listed companies will be notified and acquired from listed companies within 30 days of resolution of compliance requirements and official operation. Listed companies issued plans twice in 2019/2022 to reverse absorb all assets of the consolidated parent company, but they were all terminated due to issues such as mining concessions that could not be resolved in the short term. As of May 2024, the Group's equity under construction was 4GW, which is 1.14 times that of listed companies, and is expected to be injected into listed companies after production is put into operation as promised.

Demand for electricity is strong in Anhui, and the concentration of coal/thermal power in the province is high. We are optimistic about the company's development potential. Anhui's electricity consumption will reach 9% CAGR in 16-23, and the year-on-year growth rate from January to January 2024 will be 15%, ranking third in the country. According to estimates by the Provincial Energy Administration, Anhui's maximum electricity consumption load in 2024 was 65.3 million kilowatts, an increase of more than 16% over the previous year. In 2022, it was one of the provinces with the most severe electricity supply and demand in the country. The concentration of coal/thermal power in Anhui is high, and Huainan Mining, the controlling shareholder of the company, ranked first in the province in terms of coal production capacity and installed thermal power rights (CR3 of thermal power in the province reached 53%), providing a good foundation for the long-term development of Huai River Energy.

Risk warning: Electricity demand in Anhui and East China falls short of expectations, fluctuating coal prices, and risk of asset injection.