Release the carbon neutralization action plan and welcome the opportunity for energy-saving assets of the national network. The State Grid Corporation issued a "carbon peak, carbon neutralization" action plan on March 1, proposing to "speed up the construction of a clean, low-carbon, safe and efficient energy system, continue to promote carbon emission reduction, and lead global governance actions." We believe that one of the directions of carbon emission reduction of the State Grid is likely to be to reduce line loss at the end of transmission and distribution, or client services to help save electricity. As a listed platform for power distribution and energy saving under the State Grid, the company is expected to become an important carrier for the implementation of carbon emission reduction.

The rapid growth of energy-saving business will enhance the overall profitability of the company. Fuling Electric Power purchased 14 distribution network energy-saving projects in 2016. In 2019, the revenue of this business was 1.25 billion yuan, + 17% compared with the same period last year. We estimate that the net profit is 340 million yuan, + 32% compared with the same period last year, mainly due to the commissioning of new projects and the increase in gross profit margin. The energy saving of the company's distribution network mainly adopts the contract energy management mode, with a contract duration of 5-8 years. During the project period, the company can usually share 80-100% of the energy-saving benefits, and the company's income = benefit-sharing ratio * power saving * electricity price; after the end of the contract, the ownership of energy-saving equipment is transferred to customers free of charge. According to the typical projects disclosed in the company's 2016 acquisition report, the net interest rate of the company's energy-saving business is 10%, 25%, 0.36-0.60 yuan per kilowatt-hour, and 0.06-0.13 yuan per kilowatt-hour.

It is proposed to inject energy-saving assets into the distribution network, and the energy-saving business will continue to expand. On August 14, 2020, the company announced the "preliminary Plan for the Private offering of shares in 2020", which intends to raise no more than 1.88 billion yuan. After deducting the issuance expenses, it is mainly used to acquire the energy-saving assets of the distribution network and related EMC contract rights and obligations of the provincial comprehensive energy service companies under the jurisdiction of the State Grid, while replenishing working capital and repaying bank loans. Among them, a total of 9 energy-saving assets are injected, with a valuation of 1.322 billion yuan, and a simulated net profit of 107 million yuan in 2019, corresponding to a 12-fold valuation of PE.

The energy-saving business of the national network is expected to grow. The State Grid sold more than 4 trillion kilowatt hours of electricity in 2019, and its line loss rate is about 6%, that is, the annual power loss is more than 2400 billion kWh. According to the experience summary in the company's 2016 acquisition report: the medium and low distribution networks account for 50% of the network loss, and the energy saving of the distribution network can save 30% of the line loss, then the energy saving transformation of the distribution network under the State Grid can save 36 billion kWh / year. Considering that part of the distribution network has been transformed and may transform itself in the future, we conservatively assume that 30% of the distribution network in the national network area will be transformed by Fuling Power, that is, a power saving space of 108-180 billion kWh / year. The energy-saving business of Fuling Electric Power Distribution Network saves about 2.3 billion kilowatt-hours in 2019, and the total annual power saving of Shandong and Gansu projects that the contract expires is 280 million kilowatt-hours, then the remaining incremental market is 82-15.4 billion kilowatt-hours per year, which is 3.6-6.7 times more than that of Fuling Electric Power in 2019.

Profit forecast and valuation. We estimate that the company will achieve a return net profit of 4.29,4.61 and 496 million yuan in 2020-22, with a corresponding EPS of 0.98,1.05,1.13 yuan per share. With reference to the valuation of the comparable company and considering the unique advantages of the company as the only power distribution and energy-saving business platform under the State Grid, the company is given 20-25 times PE in 2020, corresponding to a reasonable value range of 19.6-24.5 yuan per share, which is superior to the market rating.

Risk hint. (1) with the intensification of competition, the rate of return of distribution network is likely to decline. (2) the spontaneous electricity fluctuates greatly. (3) the occupancy rate of enterprises in Liangjiang New area is lower than expected.