Dual wheel drive cash cow for clean heating and advertising business. Lianmei Holdings is essentially a holding company. It is mainly engaged in clean heating and advertising business through its subsidiary companies. Among them, Zhaoxun Media, the advertising business operator, was listed on the Shenzhen Stock Exchange in 2022. Thanks to excellent cost control capabilities, the company's profit level is ahead of its peers. At the same time, the advance payment nature of the residents' heating business made the company's cash recovery situation good. The company's cash recovery situation was abundant, and the monetary capital reached 8 billion yuan at the end of 2023, far ahead of comparable companies. Sufficient funds have helped the company pay cash dividends for 7 consecutive years. The 2023 dividend rate calculated at the closing price on June 6, 2024 reached 3.61%, which is outstanding in terms of cost performance.

The decline in coal prices brought about short-term profit improvements, and incremental+stock replacement demand helped long-term growth. The relative stability of heating prices has limited the cost transmission capacity of heating companies. Profits are under pressure in the context of high coal prices. The gross margin of representative companies in 2023 decreased by 5% to 35% compared to 2020. Therefore, in the short term, with the optimization of the coal supply and demand pattern, heating companies will benefit from a further decline in the coal price center, and profitability is expected to improve. However, in the long run, the continuous increase in the urbanization rate and the large base of industrial parks have established incremental demand for centralized heating in cities, and under the guidance of the dual carbon policy, optimization of the heating structure, which mainly focuses on coal-fired heating, will also release considerable stock replacement demand. Specifically, in Shenyang, the core business area of Lianmei Holdings, it will add 40 and 40 million square meters of heating area during the “14th Five-Year Plan” and “15th Five-Year Plan” periods, respectively. At the same time, optimization of the heating structure will generate 8900 and 75 million square meters of clean energy heating demand. Industry expansion will help related enterprises open up space for long-term growth.

The leading heating company in Shenyang, has established a core competitive barrier with its cost advantage. In a situation where heating prices are relatively stable, the revenue elasticity of heating companies mainly comes from an increase in heating area, and the ability to control costs has become a winner and loser in widening the profit gap with peers. In terms of heating area, as one of the leading heating companies in Shenyang, the company's market share in 2022 is close to 23%, so it will fully benefit from the new demand for heating space in Shenyang. At the same time, the company is also actively deploying clean energy heating technology such as biomass cogeneration and reclaimed water source heat pumps, and is expected to take advantage of Shenyang's Dongfeng to vigorously develop clean energy heating. In terms of profitability, the company has created an all-round cost advantage through long-term cooperation price locking+related party purchasing+off-season coal storage+refined management strategies, and the profit level continues to lead its peers.

The haze of the high-speed rail media business has faded away, and the digital outdoor media business in the business district is waiting to blossom. The company's subsidiary, Zhaoxun Media, is the first domestic high-speed rail media company. It has formed a digital media network that lays out the national railway network, and the number of digital media resources ranks among the highest in the country. In the short term, the resumption of travel has brought about a marginal improvement in short-term high-speed rail advertising spending, and the performance of Zhaoxun Media is expected to reach an inflection point. In the long run, it is estimated that by 2035, China's high-speed rail will reach 70,000 kilometers. Compared with the 45,000 kilometers at the end of 2023, there is still a lot of room for growth, making the value of high-speed rail advertising more prominent, and the company's high-speed rail media business has great potential. At the same time, Zhaoxun Media entered the digital outdoor media sector in the business district in 2022. The business is currently still in the early stages of investment. It is expected to contribute 75 million yuan of net profit to it every year after entering the operating period, reaching 56% flexibility compared to 2023, and is expected to become the second growth pole for Zhaoxun Media.

Investment advice: The company's net profit due to mother in 2024-2026 is estimated to be RMB 912, 9.72, and RMB 1,042 million, respectively, and the corresponding PE is 13.89x, 13.03x, and 12.16x, respectively. The company is a regional heating leader. It has excellent management and financial quality, great potential for clean heating, and maintains a “recommended” rating.

Risk warning: the risk that coal prices will rise more than expected, the risk of losing resources at high-speed rail stations, the risk that the outdoor naked eye 3D high-definition screen business will not progress as expected, etc.