The 22-year results turned a loss into a profit. Construction Investment Energy is an important power generation enterprise in Hebei South Grid. It specializes in thermal power generation projects and allocates clean energy through acquisition/participation in new energy assets. 22Q1-3 achieved net profit of 285 million yuan, YOY +138.56% (loss of 740 million yuan for the same period in '21), and the power generation company controlled by the company completed a cumulative power generation capacity of 29.249 million kilowatt-hours, YOY -3.32%; the average online settlement electricity price was 430.87 yuan/MWH, an increase of 113.16 yuan/MWH over the previous year. We think this may be due to an increase in the spot price of electricity in the provinces where the company participated. On January 31, the company announced that it is expected to achieve net profit of 115 million yuan to the mother for the full year of 2022, YOY +105%, turning a loss into a profit (loss of 2.21 billion yuan in the same period in '21). We believe that the company's annual profit level falls short of the end of the third quarter or is due to pressure on the cost side due to another rise in coal prices in the fourth quarter.

The company mainly uses coal and electricity, and the impact of coal prices is more elastic. As of mid-'22, the company held 9.15 million kilowatts of installed capacity, all of which were coal-fired thermal power units. Coal prices have been high for the past two years, and the company's performance has been greatly affected by coal prices. We estimate that electricity sales for the full year of 2022 were 35.8 billion kilowatts, corresponding to the standard coal consumption of 13.76 million tons. Every 50 yuan drop in the company's annual average coal price cost could reduce the company's fuel costs by nearly 700 million yuan. If coal prices fall, the company will usher in a clear performance improvement. Moreover, the company is more flexible among comparable companies in the same industry (see Table 3), and the ratio of electricity sold by coal and electricity to market value ranked second among selected comparable companies, which means that the impact of changes in coal prices on the company's market value is more significant than that of companies in the same industry.

Deploy new energy sources to accelerate the green and low-carbon transformation. On January 30, the company issued an announcement that the holding subsidiary Guorong Company acquired 100% of the shares of Jianhao Company. Jianhao Company specializes in developing, constructing and operating new energy projects such as photovoltaics, wind power, and energy storage. It has invested in the construction of many new energy power plants in Hebei/Shanxi/Shaanxi, etc., and has rich experience in new energy projects. As of January 30, Jianhao Company has obtained about 1,100 MW of project capacity, of which 188.5 MW has been put into operation. Furthermore, in the first half of 2022, the company wholly-owned Jineng New Energy Company was established to carry out clean energy project development work in the Inner Mongolia Autonomous Region, and participated in Green Energy Technology with a 25% share ratio to participate in hydrogen liquefaction technology research and development; seize opportunities for the rapid development of pumped storage energy and actively seek the right to participate in the project. We believe that through the internal integration of new energy generation assets, it is beneficial for the company to optimize its asset structure and transformation and development.

Profit forecasts and investment recommendations. We expect the company's net profit for 22-24 to be 1.15/451/678 million yuan respectively, with a year-on-year growth rate of 105%/290%/50%. We believe that the company will continue to benefit from cost side improvements brought about by falling coal prices, and the accelerated deployment of new energy sources will provide growth. Referring to the comparable company PB, we gave the company 1.1 × to 1.3 × PB in 2023. The corresponding reasonable value range was 6.24 to 7.37 yuan/share. For the first time, we covered a “superior market” rating.

Risk warning: Coal prices continue to run high, the development of the company's new energy business falls short of expectations, and there is a risk that electricity prices will drop.