China Galaxy Securities: The centralized heating industry is experiencing an upward trend; focus on high dividend and asset injection targets

According to the report from China Galaxy Securities, the centralized heating industry has both stable growth and high dividend advantages. It is recommended to focus on three investment lines: first, Wuzhou Huachuang (603071.SH) and LMH (600167.SH), which have low valuation levels and significant dividend yield advantages; second, Jingneng Thermal (002893.SZ), which benefits from asset injection commitments and has large installed capacity; third, GCL-Poly Energy (002015.SZ), which actively expands its industrial chain. The report points out that the industry's gross profit margin is expected to reach 26.5% in the first half of 2024, and with the decline in coal prices, profitability is expected to rebound in 2025, coupled with excellent cash flow and a dividend payout ratio of 50%, highlighting the allocation value of the sector. The main points of China Galaxy Securities are as follows: The application prospects of centralized heating are broad, with prominent energy-saving advantages Centralized heating has various advantages such as saving fuel, reducing pollution, saving land, and improving heating quality, thus receiving increasingly widespread promotion. Combined heat and power (CHP) is an important production method for centralized heating, achieving an efficiency of 75-80% through waste heat utilization, far higher than the 35-37% level of thermal power plants, showcasing significant energy-saving advantages. (1) Residential heating: The urbanization rate is steadily increasing, with an average annual increase of 604 million square meters in urban centralized heating area from 2014 to 2023, with an annual compound growth rate of 7.3%; (2) Industrial heating: The large base of industrial parks provides growth opportunities for centralized heating, with China's steam supply capacity increasing from 84,700 tons/hour in 2014 to 125,500 tons/hour in 2022, with an annual compound growth rate of 5.0%. The steam pricing mechanism model is mature, and the profitability of combined heat and power is strong and stable Combined heat and power follows the "heat determines electricity" operating model, with steam accounting for 80-90% of revenue. The electricity price follows government pricing, ensuring high revenue certainty, while the steam price is adjusted based on cost linkage methods such as coal-heat linkage and gas-heat linkage, reducing the risk of fuel price fluctuations. Taking Wuzhou Huachuang Tongxiang Tai'aisi Energy as an example, when the market coal price changes by 25 yuan/ton (corresponding to a change of 31.8 yuan/ton in standard coal), the steam price changes correspondingly by 4 yuan/ton. Assuming that one ton of standard coal produces 7 tons of steam, and 100% of the heat is used to produce steam, its coal-heat linkage mechanism can hedge about 90% of coal price changes, significantly reducing the risk of profitability fluctuations caused by rising coal prices. Compared to traditional thermal power, the combined heat and power industry has a higher gross profit margin level and smaller fluctuations, with the average gross profit margin of listed companies in the industry ranging from 20-32% since 2020, while the average gross profit margin of thermal power companies during the same period ranged from -3 to 17%. The combined heat and power industry has excellent cash flow, and dividends and dividend yields are attractive The bank has sorted out some listed companies in the thermal power industry: (1) Strong profitability and high stability: The average gross profit margin of thermal power business has been between 20-32% since 2020, expected to be 26.5% in the first half of 2024, with potential improvement in 2025 as coal prices decline; (2) Excellent cash flow: The average cash content of net profit and the average operating cash ratio are 140-160% and 110-120%, respectively, indicating excellent profitability and collection capability; (3) High dividend levels: The average dividend payout ratio in the industry in 2023 is about 50%, with an average dividend yield of about 3%; (4) Valuation differentiation: Based on the current closing price, the average PE (TTM) of the industry is slightly above 20 times, with an average PB of about 2.7 times, among which Ningbo Energy, LMH and ZMEE have PBs of 1.12, 1.18, and 1.30, respectively, indicating a clear undervaluation advantage. Risk Warning: Macroeconomic fluctuation risk; product price fluctuation risk; fuel price fluctuation risk; industrial policy change risk