The sharp rise in coal prices but the delay in electricity price adjustments caused the company to lose a lot of its annual performance. Among them, 4Q2021 lost 1.47 billion yuan in a single quarter. Market electricity prices have already begun to rise, and the pressure on fuel costs has lessened compared to the extreme situation in Q4 last year. Profits in the main coal power industry have begun to recover, but the extent of the repair still needs to be observed. It is estimated that the net profit of the mother from 2022 to 2024 will be 15/ 29/ 41 million yuan, and the target price will be lowered to 540 yuan to maintain the “buy” rating.

The full-year results showed a sharp loss of $2.21 billion, in line with expectations. Operating revenue for the full year was 15.04 billion yuan, a decrease of 2.14% over the previous year, and net profit of the mother was 2.21 billion yuan. The year-on-year profit was transferred from profit to huge loss; the full-year results were converted to EPS-1.234 yuan. The full-year results were in line with expectations. The sharp decline was mainly due to a sharp rise in coal prices and delays in electricity price adjustments. On a quarterly basis, 4Q achieved operating income of 4.31 billion yuan, a decrease of 7.84% over the previous year, and achieved net profit of -1.47 billion yuan to the mother. The corresponding EPS was -0.82 yuan.

Coal prices have risen sharply and electricity price adjustments are clearly lagging behind, and operations are under tremendous pressure. The company's annual power generation capacity was 39 billion kilowatt-hours (-7.31% YoY), using 4261 hours (-8.5% YoY). Excessive fuel costs curbed the company's willingness to generate electricity. The sharp rise in thermal coal prices pushed the company's average price of incoming coal to 866 yuan/ton (+53.8% YoY) throughout the year. The amount of electricity traded in the market has been locked in a lower electricity price by the annual contract, making it difficult for the company to adjust prices in a high coal price environment. The company's market traded electricity price only rose slightly by 0.27% to 366.06 yuan/MWH throughout the year. The sharp divergence in price and cost has put huge pressure on the company's profit. The company's annual gross margin is -4.8%, which is the first time since listing that it has experienced a negative gross profit margin. Expenses hedged cost pressure during the company's compression period, and the management expense ratio fell slightly by 0.4 percentage points to 6.1%, but there was limited help for the pressure. As a result of the sharp loss in performance, the company's net cash flow from operating activities for the year was only 148 million yuan (-94,81% YoY), far from the historical average of net operating cash flow.

The profitability of the company's coal power business has begun to recover, but the extent of improvement still needs to be observed. As the government raises the upper limit of the fluctuation range of electricity prices traded in the coal price market to 20%, we expect the company's electricity prices to rise significantly in 2022. We expect the company's average electricity sales price after tax deduction in 2022 to 391 yuan/megawatt-hour; in terms of cost, considering that the government has clarified that the price range for medium- to long-term coal contracts is 570-770 yuan/ton and supervision is being continuously strengthened to ensure long-term cooperation implementation, we expect the company's fuel cost pressure to decrease throughout the year, but considering that the domestic coal supply and demand situation is still tight, we expect the company's fuel cost pressure to be reduced throughout the year. There is relatively limited room for fuel costs to decline (-4% YoY). Judging from the overall trend of electricity prices and coal prices, we expect the company's profitability to recover from extreme losses in the fourth quarter of last year, but the extent of profit recovery remains to be seen.

Risk factors: Continued increases in coal prices are squeezing profits, feed-in electricity prices are lower than expected, and power generation is lower than expected.

Investment advice: Although electricity prices in the market have clearly risen, coal prices are high. It is expected that the company's profitability will still be at a low level. Lower the company's 2022-2024 EPS forecast to 0.08/0.16/0.23 yuan (previous forecast was 0.06/0.22/0.39 yuan). Referring to the company's historical valuation and market valuation level over the past 5 years, give the company a certain valuation discount, give the company 1 times the target PB in 2022, lower the target price to 5.40 yuan, and maintain the “buy” rating.