Transmission, distribution and sales integration company, performance growth shifted to the distribution network energy-saving business company is a collection and distribution of power distribution and distribution network energy-saving business integration of electric power enterprises. Founded in December 1999 and listed on the Shanghai Stock Exchange in 2004, the company integrates the business of power transmission and distribution, mainly engaged in power supply and sales, and the power supply area is mainly concentrated in the administrative area of Fuling District of Chongqing. In April 2016, the company acquired the energy-saving business of distribution network of State Grid Comprehensive Energy Company, and the scope of business was extended to the field of energy-saving of distribution network. Benefiting from the increase in the proportion of energy-saving services and the high growth of its gross profit margin, the company's profitability continues to improve, with a net profit rate of 15.1% in 2019.

The energy-saving industry of the distribution network is expected to develop continuously. The market space is over 40 billion. At present, the energy-saving and environmental protection industry has become a pillar industry of the national economy. Policy support continues to promote the development of the energy-saving industry of the distribution network in order to improve the energy efficiency of the distribution network and achieve energy conservation and emission reduction. Compared with the average line loss rate of 4.12% in Japan, South Korea and Germany, the transmission and distribution efficiency of China's power grid is currently 5.9%, which still has much room for improvement. Against the background of the decline in the total profits of the State Grid, the 2020 government work report requires that the policy of reducing industrial and commercial electricity prices by 5% be extended to the end of this year, and the State Grid will resolutely implement it. While the growth of the revenue side continues to face bottlenecks, it is expected that the State Grid will have the incentive to achieve profit targets through internal potential channels such as reducing line loss rates. As the energy-saving business of distribution network mainly obtains the source of income based on energy-saving electricity and the contractual benefit-sharing ratio, assuming that the sales and price of electricity sold by the national network remain unchanged, it is expected that the energy-saving market space of distribution network in China will reach 45.9 billion / year in the future.

On August 15, the company issued the announcement of "2020 non-public stock offering plan", in which the company will issue shares not exceeding 24.% of the company's total share capital, which will be mainly used to acquire energy-saving assets and related EMC contract rights and obligations of the distribution network of the provincial comprehensive energy service company under the jurisdiction of the State Grid, while replenishing working capital and repaying bank loans. As of March 31, 2020, the book value of energy-saving assets of provincial distribution networks is 943 million, the underlying assets are priced at 1.322 billion, and the value-added rate is 40.20%. The target's net profit for the first quarter of 2018-2020 was 62 million, 107 million and 26 million. The net profit of the underlying assets in 2019 is 26.95% of the net profit of the listed company. If the acquisition of the energy-saving assets of the State Grid can be successfully completed, the listed companies will realize the integration of the energy-saving assets of the distribution network of the State Grid. It is clearly pointed out in the "non-public offering stock plan" that there will be no inter-industry competition between the listed companies and the controlling shareholders and their related persons.

Profit forecast and investment advice:

Due to the uncertainty of non-public offering, the acquisition of assets is not considered for the time being. The company is expected to achieve a net profit of 4.41,4.91 and 564 million yuan from 2020 to 2022, with an PE of 18.9,17 and 14.8 times. The average PE of the comparable company in 2021 is 27.4 times. Considering the uncertainty of the current non-public offering shares, the target PE of Fuling Power is valued at 23.3 times and the target price is 26.10 yuan.

Risk hints: the risk that the construction progress of distribution network energy-saving projects is not as expected, the risk that the integration of distribution network energy-saving assets of provincial power grid companies is not as expected, and the risk of changes in preferential tax policies.