An “energy+logistics” comprehensive enterprise in Anhui Province: The company was formerly known as Wuhu Port, and changed its name twice to the current Huaihe Energy. The business covers logistics trade, electricity, coal, and railway transportation. Looking at the gross profit structure, the gross profit contribution of the logistics trade sector is small. The railway transportation sector benefits from the operating model and the gross profit contribution is basically stable. The gross profit of the electricity and coal sector has fluctuated significantly in the past three years due to changes in coal prices. In 2023, the four major sectors of logistics trade, electricity, coal, and railway transportation accounted for 8%, 33%, 28%, and 24% of gross profit, respectively.

Adhere to the path of integrated coal and electricity management to ensure profit stability: By the end of 2023, the company had a total holding+shareholding of 4.91 million kilowatts of thermal power installed and 6 million tons/year of Dingji coal mine. Among them, the Dingji Coal Mine, as a supporting coal mine for the Tianji Power Plant, has achieved complete integration of coal and electricity since it was put into operation in 2007. Compared with traditional thermal power, the operating risks caused by fluctuations in coal prices are greatly reduced. While ensuring long-term stable supply of fuel for power plants, it can also reduce intermediate procurement processes and guarantee high and stable profitability. At the same time, the rest of the power plants are all Kengkou power plants, and the required coal raw materials are all insured by the group. They are relatively close, and can be reached by automobile or internal railway transportation to the listed company's power plants. It is worth noting that in 2021-2023, the company's gross profit was 0.001, 0.022, and 0.035 yuan/kilowatt-hour respectively, which increased after shutting down the loss-making power plant and Panji Power Plant Phase 1 injection, but overall there is still a gap compared to Xinji Energy Lixin Panji Kengkou Power Plant Phase 1, which is also located in Anhui. Considering that both power plants are located in the coal-rich area of Huainan, the coal mining costs are similar to a certain extent, and the standard coal consumption for electricity supply is close. Subsequent, with the support of spot market trading mechanisms and capacity electricity price policies, the gross margin of Panji Power Plant Phase 1 is expected to move closer to Lixinbanji Phase 1 of Tongwei Kengkou Power Plant, which in turn will drive the company's overall electricity gross profit to increase upward.

The Group's asset injection has not yet ended, and subsequent thermal power increases can be expected: According to the open market promises made by the controlling shareholder Huainan Mining Group during the 2016 restructuring, the Panji Power Plant Phase 2, Xieqiao Power Plant, and late-stage coal power projects will also be injected into listed companies after the conditions for commissioning and operation are met. Currently, Panji Phase 2 and Xieqiao Power Plant's total 2.64 million kilowatt units are expected to be put into operation in the second half of 2025, and the injection process is expected to begin after production. Furthermore, at the end of 2023, the controlling shareholder of Anhui Huainan Luoneng Power Generation Co., Ltd. was changed from Datang Anhui Power Generation Co., Ltd. to Huaihe Energy Holding Group Electric Power Group. The Luohe Power Plant currently has 2.54 million kilowatt units in operation, and the Luohe Phase 4 ultra-supercritical coal-fired generator sets were approved by the Anhui Provincial Development and Reform Commission at the end of 23. In the future, with promises to avoid competition among peers, it is not ruled out that other power assets within the group will still be injected into listed companies in the long term, which is expected to bring room for further growth in the scale of coal and electricity assets.

Actively give back to shareholders, and there is great potential for subsequent dividends: The company announced a shareholder return plan for the next three years (2024-2026), requiring that the cumulative profit distributed in cash for the last three years is not less than 30% of the average annual distribution profit achieved in the last three years. According to the annual report, the company plans to distribute a total of 462 million yuan (tax included) in 2023, accounting for 55% of net profit due to mother in 2023. The dividend rate is 3.4% based on the closing price of May 21, 2024. Looking forward to the future, a steady business model integrating coal and electricity is expected to bring stable cash flow, compounded with controllable asset expenses and debt burdens. The company's future dividend potential is worth looking forward to.

Investment advice: Give a “buy-A” investment rating. We expect the company to achieve operating income of 27.47 billion yuan, 27.76 billion yuan, and 28.29 billion yuan respectively in 2024-2026, with growth rates of 0.5%, 1.1% and 1.9%, respectively; net profit of 1.09 billion yuan, 1.13 billion yuan, and 1.18 billion yuan respectively, with growth rates of 29.7%, 4.0% and 4.1% respectively. The company has rich experience in integrated operation of coal and electricity. The coal nest electricity supply and group guarantee model have strongly guaranteed the profit stability of its power plants. In the short term, the normal operation of Panji Power Plant Phase 1 combined with the shutdown of the loss-making power plant is expected to help increase the company's overall gross margin of electricity; in the long run, with promises to avoid competition among peers, the possibility of injecting power assets within the group into listed companies in the long term is expected to lead to another expansion in the scale of thermal power. The company was given 15xPE in 2024, with a target price of 4.2 yuan for 6 months.

Risk warning: Fluctuations in coal prices, asset injection progress falling short of expectations, production safety risks, environmental risks, changes in geological conditions affecting the company's coal quality risk, prediction assumptions and model errors exceeding expectations, dividend ratios falling short of expectations, risk of declining coal and electricity usage hours, risk of falling coal and electricity prices, and risk of frequent management changes.