1H21's performance exceeded our expectations.

China Electric Power announced 1H21 results: the company's operating income in the first half of the year was 16.543 billion yuan, up 6.7% from the same period last year, and its net profit was 1.372 billion yuan, up 17% from the same period last year. The rapid growth of the new energy business has driven the performance beyond our expectations with the rapid increase in heating revenue.

The new energy business has boosted the impact of hedging coal prices, contributing nearly half of its profits. In the first half of the year, the after-tax profits of the company's wind power and photovoltaic sectors increased by 37% and 21% to 608 million yuan and 412 million yuan respectively, contributing a total of 46%. Compared with last year, the rapid growth of 5ppts new energy profits is due to 1) wind power and photovoltaic electricity sales rose 41% and 54% respectively. 2) New projects push up wind power prices by + 4% year-on-year. On the other hand, photovoltaic is affected by parity and competitive projects connected to the grid. The electricity price is 16.7 "volume and price rise" compared with the same period last year. It is difficult to offset the high coal price. The after-tax profit of thermal power is reduced by 529% to break even. The performance of water and electricity is stable. The strong demand for electricity has narrowed the market discount, and the company's 1H2 thermal power sales and electricity prices have increased by 27.5% and 3.5% compared with the same period last year, but we estimate that the fuel cost of the company's kilowatt-hour electricity is + 20% higher than the same period last year. The after-tax profit of water and electricity is kept at 1.05 billion yuan (0.8% compared with the same period last year), which strictly controls the labor and operation and maintenance costs. In the first half of the year, the company added new installed 1.58GW, but labor costs remained stable, accounting for 7.1% of revenue, and 23% of operation and maintenance costs compared with the same period last year. However, the financial expenses caused by higher leverage are + 17% compared with the same period last year, which is mainly due to the increase in debt and the increase in interest payments. by the end of the first half of the year, the company's asset-liability ratio is from + 2ppts to 72

The proportion of clean energy installed without companies is expected to exceed 50% in 2021, so there are opportunities for revaluation. As of June 30, the company merged and installed 284GW (year-on-year + 3.42GW), including 53% of coal power, 19% of hydropower, 11% of wind power and 17% of photovoltaic. According to the company, the pace of transformation will be accelerated in the second half of the year, with the completion of 1.58GW), and the addition of 2GW coal power (the last two) and about 4GW clean energy will continue in the second half of the year. With the start of the "carbon neutralization" cycle, wind power and photovoltaic projects have returned to high growth, while the stable return and cash flow of parity projects have been recognized by the market, and the valuation of new energy operating assets has been significantly repaired since the second half of last year (leading enterprises have risen by more than 50%). At present, the company only corresponds to 97 times earnings and 0.6 times book value in 2021, and we believe that it has not yet reflected the high growth and high dividend value of the company in the future.

Profit forecast and valuation

Keep profit forecasts for 2021 and 2022 unchanged. The current share price corresponds to a price-to-earnings ratio of 9.7 times 2021 / 2022. Maintain the industry rating, but in view of the fact that the company is gradually given a higher valuation by the market after transforming into new energy companies, we raise our target price by 31.8% to HK $2.94 corresponding to 12.7 times 2021 price-to-earnings ratio and 99 times 202-year price-to-earnings ratio, which has 307% upside compared to the current share price.

Risk

Water falls short of expectations, and coal prices remain high.