(Source: Market capitalization Fengyun APP that must be used in the era of registration system)
On August 11, 2022, the restructuring was unconditionally approved by the China Securities Regulatory Commission. What is the texture of the restructuring that has caused market concern? Let's take a look together below.

(Source: Company Announcement)

(Source: Tested Market Value Fengyun App Wugu Rating)
The company is mainly engaged in the purchase and sale of electricity, power generation, power design, and distribution of electricity. It is responsible for direct power supply services in five cities and counties in Wenshan Prefecture, including Wenshan, Yanshan, Qiubei, Funing, and Xichou, as well as bulk electricity sales services to Baise Power Supply Bureau of Guangxi Power Grid, Debao, and Napo counties in Guangxi.
It can also be seen from this market area that there are not many highlights.
The CAGR of the company's total revenue from 2015 to 21 was only 1.7%. In the first quarter of 2021 and 2022, the growth rates were 2.16 billion and 600 million respectively, with year-on-year growth rates of 15% and 18%.

Although the recent revenue growth rate has been decent, the net profit after deducting taxes is not satisfactory. In 2021, it was only 80.84 million, a new low in six years, with a year-on-year growth rate decline of 13.9%.

This restructuring will divest all assets and liabilities related to the main business of the listed company, as well as its 100% equity holdings in Wendian Design Company and Wendian Energy Investment Company. The final valuation of the divested assets is 2.1 billion yuan.
2. Purchase energy storage assets from Southern Power Grid and build a pumping and storage platform

And the restructured assets will be 100% equity of Peak Frequency Modulation Company, with a final consideration of 15.68 billion yuan. Southern Power Grid is the actual controller of the company, holding 100% of its equity.
The difference between the assets acquired and acquired is 13.58 billion yuan, which will be supplemented by the issuance of shares by the listed company to Southern Power Grid. The issuance price is 6.52 yuan per share, and the number of shares issued is 2.086 billion shares. After the transaction is completed, Southern Power Grid will become the direct controlling shareholder of Wenshan Electric Power, holding 81.35% of its shares.

(Source: Revised draft of asset restructuring plan)
In addition, the company plans to raise supporting funds of 9.3 billion in this restructuring, which will be issued in a non-public manner, with an issuance quantity not exceeding 30% of the total share capital of the company. After all transactions are completed, Southern Power Grid will hold 62.57% of the company's shares.

(Source: Revised draft of asset restructuring plan)
After the completion of the transaction, Wenshan Electric Power's main business will shift from selling electricity and bulk selling electricity services to three major businesses: pumped storage, peak shaving hydropower, and independent energy storage on the grid side.

(Peak shaving hydropower workflow)
Currently, 5 pumped storage power stations with a total installed capacity of 7.88 million kilowatts have been put into operation, and 2 peak shaving hydropower stations with a total installed capacity of 1.92 million kilowatts and 4 electrochemical energy storage power stations with a total installed capacity of 30 MW have been put into operation.
Compared to the peak shaving frequency modulation companies that have set up assets in South China, the revenue volume is larger and the net profit attributable to the parent company is more impressive. In 2021, its revenue was 4.78 billion yuan, with a year-on-year growth rate of 2.8%. In the first quarter of 2022, it was 1.29 billion yuan. In 2021, the net profit attributable to the parent company was 980 million, with a year-on-year growth rate of 8.4%.

And the peak shaving frequency modulation company has good profitability, with a gross profit margin of 60.9% in the first quarter of 2022, an increase of 7.4 percentage points from the end of 2020. Compared to the gross profit margin of 24.7% for the same period of the assets, it is also 36 percentage points higher.
Not only that, the total assets of the peak shaving frequency modulation company at the end of the first quarter of 2022 were 34.75 billion yuan. After the transaction is completed, the total assets of Wenshan Power will achieve a tenfold increase.

(Source: Revised draft of asset restructuring plan)

Pumped storage business is the main revenue driver, and the future of new energy storage is promising

Among the three major businesses of peak shaving frequency regulation companies, pumped storage power generation is the main revenue generating business, accounting for nearly 70% of total revenue. The peak shaving hydropower business has the highest gross profit margin and is the main driver of the company's comprehensive gross profit margin. However, the independent energy storage business on the grid side is not yet large-scale, accounting for less than 0.5% of total revenue.

(Source: First inquiry response draft)
Looking at it separately, the gross profit margin of pumped storage energy, which accounts for the highest proportion, has remained relatively stable at 52%. The gross profit margin of peak shaving hydropower first decreased and then increased, reaching 60.8% in the first half of 2021. Although the gross profit margin of independent energy storage on the grid side has been increasing, it was only 29.3% during the same period.

(Source: First inquiry response draft)
Pumped storage power generation is the period of policy implementation

In this restructuring, the market mainly focuses on its pumped storage business, while the peak shaving and frequency regulation company of Southern Power Grid holds considerable pumped storage assets in terms of both quantity and quality.
In addition to the 5 pumped storage power stations currently in operation, 2 are still under construction and are currently in the final stage of the unit production project. In the short term, the company will have a total installed capacity of 10.28 million kilowatts of power stations. In addition, the company also has 12 pumped storage stations under construction, totaling 13.8 million kilowatts, which are expected to be completed gradually before 2032.

(Workflow of Pumped Storage Power Station)
In terms of total capacity, in September 2021, the National Energy Administration released the "Medium - and Long Term Development Plan for Pumped Storage Energy (2021-2035)". By the end of 2025, the installed capacity of pumped storage energy in China will reach over 62 million kilowatts; By the end of 2030, achieve the overall development goal of over 120 million kilowatts.
According to statistics from China Electric Power Union, the industry's compound annual growth rate reached 14.3% from 2020 to 30, and the next decade is the policy period for pumped storage power generation. If the company can have a total installed capacity of 24.08 million kilowatts as scheduled, it will occupy 20% of the national market share.
In terms of pricing, according to the 2021 Opinions of the National Development and Reform Commission on Further Improving the Price Formation Mechanism for Pumped Storage Power Stations (Development and Reform Price No. 633), the pricing model for pumped storage power stations will undergo changes after 2023. The electricity prices of the two power stations currently operated by the company will be changed from a single capacity system to a two-part system.

(Source: Inquiry Letter Response Draft)
This policy change means that the company's two power stations are expected to increase their electricity revenue by 28.141 million yuan/year to 51.3275 million yuan/year. In terms of capacity electricity pricing, Document No. 633 specifies that pumped storage power stations are based on assets and set a guaranteed 6.5% internal rate of return on capital during the operating period.

(Source: Inquiry Letter Response Draft)
2 private placement fundraising of 9.3 billion yuan, with additional investment in "pumped storage+energy storage projects"

The fundraising of 9.3 billion yuan mentioned earlier, in addition to expanding its pumped storage business, the company will also make efforts in electrochemical energy storage projects, investing nearly 1 billion yuan to build two energy storage power stations with an installed capacity of 370000 kilowatts, and an additional 1.1 billion yuan to supplement the flow.

(Source: Revised draft of asset restructuring plan)

(Grid side independent energy storage workflow)
In addition, about 97% of the revenue of peak shaving frequency modulation companies in the past two years comes from the top five customers, with a high concentration, but this is also related to the characteristics of the power industry.

(Source: Inquiry Response Draft)

From 2015 to 2021, Wenshan Electric Power distributed a cumulative dividend of 368 million yuan over the past 7 years, with a net profit attributable to the parent company of 1.17 billion yuan and a dividend rate of 31.4%, which is commendable. Compared to the traditional electricity sales business that has been acquired after restructuring, the profitability of assets acquired is stronger and there is more room for development. We look forward to the company maintaining its previous good dividend performance.

After asset restructuring, Southern Power Grid will focus on pumped storage, peak shaving hydropower, and grid side energy storage businesses based on Wenshan Electric Power.
At present, the profitability of peak shaving hydropower business is strong, but the water inflow situation of the basin will bring uncertainty to the business. The installed capacity of the pumped storage industry, the main revenue generating industry, will double in the next ten years, which is the performance growth point, while the small-scale grid side energy storage business will also exert its power and increase its investment.
After the restructuring, the main business of Wenshan Electric Power has improved in quality compared to before, but the construction and operation of power stations under pumped storage business require a long cycle, which brings a lot of uncertainty and still leaves a long way to go.