Incident: On September 5, 2024, Shaanxi Coal Industry announced that it signed an “Asset Transfer Intent Agreement” with the controlling shareholder, Shaanxi Coal Chemical Group. Shaanxi Coal Group intends to transfer all of its shares in Shaanxi Coal Electric Power Group Co., Ltd. to Shaanxi Coal. This transaction is the company's first step towards “integrated coal and electricity” operation. It can further reduce related transactions, increase revenue, extend the main coal industry chain, and promote the company's high-quality development.

Comment:

With high-quality resources in northern Shaanxi, the main coal industry is steady and far-reaching. The company is rich in coal resources. It has 10.441 billion tons of coal mining reserves (as of the end of 2023), and can be mined for more than 70 years. More than 97% of coal resources are located in high-quality coal mining areas such as northern Shaanxi and Binhuang. The coal quality is excellent, the storage conditions are good, and the mining cost is low. The company has an approved coal production capacity of 0.162 billion tons, and the company has 5 pairs of 10 million ton mines in the northern Shaanxi mining area, with significant production capacity advantages. The company's coal production increased steadily. From January to August 2024, it achieved a cumulative total of 0.114 billion tons of coal production, +2.45% over the same period last year. In the future, with the approval and construction of fields related to Little Houtu No. 1 and the western exploration area, compounding the company's advantages of low mining costs and high service life, the company's main coal business is expected to stabilize and prosper.

Electricity assets are mainly coal and electricity, and the profit situation is relatively good. As of the end of March 2024, the controllable installed capacity of Shaanxi Coal Electric Power Group was 9.418 million kilowatts, including 9.02 million kilowatts of thermal power. The units are mainly distributed in Henan, Shaanxi, Shanxi, Hunan and other provinces. In terms of electricity, the Group achieved 34.939 billion kilowatt-hours of power generation and 32.661 billion kilowatt-hours of feed-in electricity in 2023. In terms of electricity prices and costs, the Group achieved an average electricity sales price of 437 yuan/megawatt-hour, achieving a unit price of 846.44 yuan/ton of standard coal entering the furnace, and a coal consumption of 324.03 g/kilowatt-hour for electricity supply. Based on the Group's total profit of 1.798 billion yuan in 2023 and a 25% income tax rate, the unit's profit reached 3.86 points. Benefiting from the Group's collaborative supply of coal resources, the unit price of the company's standard coal fired has a clear advantage over major thermal power companies. Even though the coal consumption level for electricity supply is dragged down by thermal power units, it still achieved a profit of 3.86 cents per kilowatt hour of electricity. The company's overall profit situation is relatively good.

The volume of projects under construction and approval is considerable, and installed capacity growth can be expected. The coal power projects under construction include Changan Yiyang 2 million kilowatts, Shaanxi Coal Shimen 1.32 million kilowatts, Shaanxi Coal Telecommunication and Electricity 2 million kilowatts, and Shaanxi Coal Miluo 2 million kilowatts, for a total of 7.32 million kilowatts. In addition, Shaanxi Coal has been approved for 2 million kilowatts. The total number of projects under construction and to be built is 9.32 million kilowatts. After all are completed and put into operation, the Group's coal and electricity installed capacity can double. Furthermore, the units under construction and to be built are mainly distributed in provinces where power supply and demand conflicts are prominent, such as Hunan and Jiangxi. We expect that the units under construction and to be built by the company are expected to benefit from the regional electricity supply and demand pattern and achieve a “double high” electricity price.

With the integrated collaborative development of coal and electricity, performance and profit certainty are expected to improve. In 2024, the National Energy Administration issued the “Guiding Opinions on Energy Work 2024", which proposes to promote integrated coal and coal-electricity partnerships and rationally lay out supportive and regulated coal power. The company's acquisition of Shaanxi Coal and Electric Power Group is an important step to establish an “integrated coal and electricity” operating model. Through the “integrated coal and electricity” operation, the impact of fluctuations in coal prices and changes in electricity demand can be smoothed out, so that the company can maintain stable operation. At the same time, the profit margins of companies in the main coal industry chain will also be increased by extending the main coal industry chain. In the context of integrated collaborative development of coal and electricity, the company's performance space and operating stability are expected to improve in the future, and there is plenty of room for valuation improvement.

Profit forecast and investment rating: We believe that in the context of continuing high energy inflation, the domestic thermal coal price center is expected to operate at a medium to high level. The Shaanxi coal industry has high quality coal resources in northern Shaanxi. Over the long term, there is plenty of room to release production, and the company has broad prospects for future development. Without considering the impact of stock price fluctuations on net profit, we expect the company to achieve a net profit of 21.6/22.3/23.2 billion yuan in 2024-2026; EPS of 2.23/2.3/2.39 yuan/share, and PE of 10.79/10.46/10.07 times, maintaining a “buy” rating.

Risk factors: There is uncertainty about the macroeconomic situation; geopolitical factors affecting the global economy; uncertainty about coal and electricity-related industry policies; production safety accidents in coal mines, etc.