Incident: On March 29, the company announced an agreement to transfer shares of Changjiang Securities. It plans to transfer 0.53 billion shares to Changjiang Industrial Investment at a price of 8.2 yuan/share. After the transaction is completed, the company will no longer hold shares in Changjiang Securities.

It is proposed to transfer 9.58% of Changjiang Securities's shares to focus deeply on the main business, or a one-time return on investment. In order to optimize the industrial layout, focus on the main business, and enhance the company's core competitiveness, the company plans to transfer 0.53 billion shares of Changjiang Securities (9.58% of Changjiang Securities) to Changjiang Industrial Investment Group Co., Ltd. (“Changjiang Industrial Investment” for short, wholly-owned by the Hubei Provincial State-owned Assets Administration Commission) at a price of 8.2 yuan/share. The transaction is a cash transaction. After the transaction is completed, the company will no longer hold shares in Changjiang Securities and receive 4.343 billion yuan in cash. Looking at the stock price, the current stock price of Changjiang Securities is 5.13 yuan (closing price on March 29), with a premium of about 60%; in terms of asset value, the book value of Changjiang Securities assets currently held by the company is 3.166 billion yuan (unaudited, announced), with a 37% premium.

We believe that the Hubei Provincial State-owned Assets Administration Commission, as the second-largest shareholder of Hubei Energy, supports Hubei's energy development in cash.

As of the third quarter of 2023, the company has a balance ratio of 56%, no perpetual debt, and is at an excellent level in the power industry. This transaction will provide new impetus for the company's subsequent development of its main energy business; Hubei Energy's annual performance under one-time investment income is worth looking forward to.

High-quality assets go beyond electricity; coal trade and natural gas sales are of great strategic value. In our in-depth report released on March 27, we detailed the company's electricity assets and assessed their electricity assets in parts. Under conservative considerations, other assets will not be valued for the time being. The premium of Changjiang Securities to be traded this time is sufficient to show the conservatism of our previous valuation. Specifically, the company's non-electricity assets also include coal trade and natural gas business. Among them, the coal trading operator is the coal investment company (the company holds 50% of the shares and holds 50% of the shares; Shaanxi Coal Chemical holds 50% of the shares), which operates the first phase of the Jingzhou Coal and Iron Water Intermodal Transport and Distribution Station project, the largest coal iron and water intermodal transport project in central China, and is carrying out preliminary work on the second phase of the project. The natural gas business operator is Natural Gas Development (the company holds 51% of the shares and Sinopec holds 49%). It is a natural gas resource regulation platform in Hubei Province, cooperating with the commissioning of the national “East Sichuan Gas Transmission” and “West-East Gas Pipeline Line 2” projects, and is responsible for the unified construction of receiving station projects and supporting natural gas branch line projects in Hubei Province.

Resonance of water and fire has improved dramatically, and the reform and valuation of central enterprises is expected to be boosted. The company is a regional integrated energy platform under the Three Gorges Group. As of the first half of 2023, the holding installed capacity was 12.75 million kilowatts, of which 466, 4.63, 1.12, and 2.34 million kilowatts of hydropower, thermal power, wind power, and photovoltaics were respectively. From a valuation perspective, in the hydropower sector, the diversified power supply structure caused the company's abundant hydropower assets to be flooded in the company's statements, and the market has not fully understood this; in the thermal power sector, under market-based transactions, the company's excellent unit quality, steady electricity prices in the province, increased long-term cooperation ratio, and doubled installed capacity growth have all laid the foundation for the nirvana growth of the thermal power business; in the new energy sector, the company's new energy development is very restrained, and the profit of selected projects is stable. From a performance perspective, Hubei had plenty of incoming water in the first quarter of 2024, and the water level at the Shuibuya Power Station remained high. The company's hydropower volume more than doubled in January-January, and the absolute value increased by 1.651 billion kilowatt-hours; the decline in market coal prices combined with a prolonged increase in the ratio enjoyed double flexibility. At the same time, electricity consumption in the province remained high. The company's thermal power generation increased 20% in January-February, and the company's first quarter results are worth looking forward to.

Profit prediction and valuation: Considering the uncertainty of the transaction, we temporarily maintain the company's net profit to mother of 18.1 (announced disclosure), 2.89, and 3.44 billion yuan in 2023-2025. The current stock price is 13 and 11 times the 2024-2025 PE, respectively.

Under the segmental valuation method, the company's intrinsic value is 255 (hydropower) +74 (thermal power) +98 (new energy) = 42.7 billion yuan. The company owns coal trading, natural gas sales and other businesses, and holds 9.58% of Changjiang Securities and 10% of the shares in Three Gorges Finance. Under conservative estimates, valuation is not considered for the time being, and maintains a “buy” rating.

Risk warning: The incoming water fell short of expectations, the increase in coal prices exceeded expectations, and the installed capacity of new energy fell short of expectations.