Coal-power joint ventures with high growth targets were covered for the first time and were given an “increase in holdings” rating

The company started with a coal business. In 2016, the SDIC was transferred to the China Coal Group. In the same year, the board power collection plant was put into operation. The company achieved a breakthrough of zero in electricity holdings and transformed from a coal company to a coal-power joint venture.

As of 24Q1, the company's full-caliber holding/equity power installed capacity was 796/5.61 million kilowatts, and the total production capacity of holding/equity coal was 28.5 million tons/year (including 5 million tons/year for the Yangcun coal mine, which is undergoing reconstruction). Considering Xinji Energy: 1) Panji Phase II is expected to be put into operation in '24, with 1.32 million kilowatts of additional holding power, 2) the degree of coal-power co-operation is expected to increase after Panji Phase II is put into operation; 3) The profitability of the power business is higher than that of comparable companies, and 4) there is plenty of room for power production capacity expansion by 198% in '26 and before. We expect the company's net profit to be 21.5/24.5/2.66 billion yuan in 2024-2026, and the comparable company's average PE value in 2024 is 13.5x. We gave the company a 2024 PE13.5x, corresponding to a target price of 11.2 yuan. For the first time coverage, we gave it an “increase in weight” rating.

With high-quality assets, Thermal Power's profitability is the highest among comparable companies

The company has high quality coal & power assets. In 2023, the total amount of coal resources in coal production mines was 3.5 billion tons, with a storage ratio of 73, second only to Shaanxi Energy and Huainan Mining Headquarters coal mines; in 2022, the first phase of the company's Banji Utilization Hours reached 5,378 hours, ranking first among comparable companies (slightly lower than China Electric Power in 23). Although the company has no advantage in coal mine costs in Anhui, the company's net electricity profit for 22-23 reached 0.06 yuan/degree and 0.07 yuan/degree under high power generation efficiency, ranking first among comparable companies, and the profitability of the power business is strong. We expect that in 2026, a large proportion of the company's coal will be converted to personal use, the contribution revenue from export coal sales will decrease, and the company's overall profit level will mainly be determined by electricity assets.

There is plenty of room for expansion of electricity production capacity. The degree of electricity and coal matching in '26 is comparable to Shaanxi Energy's 2 million kilowatts of coal and electricity installations in operation as of 24Q1, and 5.96 million kilowatts of coal-electricity installed capacity under construction+ preparation. Corresponding to 198% growth space, it is expected that all power plants will be put into operation in '26 or earlier. We estimate that up to 2026, the annual coal consumption of the company's holdings/equity coal power was 1156/8.14 million tons, and the shareholding/equity standard coal output was 12.77 million tons, so the company's electricity consumption exposure at the holding/equity level was only 9% and 36% (75% and 78% in 2023). The coal exposure to the outside world was significantly reduced, and the coal & electricity matching at the holding level was comparable to Shaanxi Energy (5% of the coal consumption exposure at the holding level in '26).

Demand for electricity in Anhui is strong, and the concentration of coal/thermal power in the province is high. We are optimistic that Anhui's electricity consumption will reach 9% CAGR in 16-23, and 15% year-on-year growth in January-March 2024, ranking third in the country. We expect the electricity consumption of the entire society in Anhui Province to grow 15%/12%/10% year on year in 24-26, and the total installed capacity of electricity will be 120/130/138 GW. According to estimates by the Provincial Energy Administration, in 2024, Anhui's maximum electricity consumption load was 65.3 million kilowatts, an increase of more than 16% over the previous year. In 2024, Anhui was one of the provinces with the most severe electricity supply and demand in the country. Anhui has a high concentration of coal/thermal power, and the company's controlled coal production capacity and controlled thermal power market share rank third and fourth, and is expected to fully benefit.

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