Introduction to this report:

The company focuses on the main electricity business, and the loss-making natural gas business is expected to kick off the Group's asset integration.

Key points of investment:

Maintain the “Overweight” rating: Maintain the 2024-2026 EPS to 0.92/1.19/1.48 yuan.

Refer to industry comparable company valuations and maintain the target price of 16.32 yuan due to prudential considerations, maintaining the “gain” rating.

Incident: The company issued the “Prompt Notice on Planning a Joint Capital Expansion and Related Transactions with Yunnan Energy Investment Co., Ltd. for Yunnan Shale Gas Exploration and Development Co., Ltd.” The company is planning to jointly increase the capital of the shale gas development company with its 52.5% and 47.5% shares in the natural gas company, respectively.

The natural gas business is presented to optimize the quality of the company's consolidated business assets. After the capital increase is completed, the shale gas development company will become the company's shareholding company (the natural gas company will become a wholly-owned subsidiary of the shale gas development company), and the natural gas company will no longer be included in the scope of the company's consolidated statements. The natural gas sector revenue of the 1-3Q24 company was 0.85 billion yuan, +67.5% year on year; during the same period, it affected the company's net profit to mother -0.043 billion yuan, -0.015 billion yuan year on year. Affected by the fact that there is still a large gap between the actual gas transmission volume of the branch line pipeline and the designed gas transmission volume, the company's natural gas has been in a state of loss for a long time. We believe that the gas company's presentation will help optimize the company's consolidated asset quality and financial indicators. The shale gas development company is mainly responsible for exploration and development of shale gas (total recoverable reserves of 17.8 billion cubic meters) in the Daguan Mugan-Shoushan block of Zhaotong. The average annual gas production volume is expected to be 0.47 billion cubic meters after stable production.

Focusing on the core business of new energy, the Group's extracorporeal clean energy assets are huge. We believe that this transaction will help the company concentrate resources to further focus on the development of the new energy core business and highlight the core development direction of the new energy strategy. The company has signed a “Alternative Cultivation Framework Agreement” with the controlling shareholder Yunnan Energy Investment Group and its wholly-owned subsidiary Green Energy Group: the agreement stipulates that the energy investment group's new energy projects meet the conditions for injection into listed companies, and the company has priority purchasing rights under the same conditions, or Yunnan Energy Investment Group gives priority injection to the company through compliance methods. As of the end of 1Q24, Yunnan Energy Investment Group held 0.5/2.8/12.6 GW of hydropower/new energy/shareholding hydropower installed equipment, and by the end of 2Q24, the company had signed an agreement with Yunnan Energy Investment Group to cultivate the installed capacity of 1.2 GW. We expect that this related transaction is expected to kick off the asset integration of Yunnan Energy Investment Group. As the Group's sole holding power generation listing platform, the company has the potential to inject unlisted clean power assets into the Group.

Risk warning: Electricity demand falls short of expectations, salt and nitrogen business operations fall short of expectations, asset acquisition progress and plans fall short of expectations, etc.