The performance was slightly lower than expected: the company realized income / return net profit of HK $12.9 / 567 million in the first half of the year, which was + 2.4% and 9.0% compared with the same period last year, which was slightly lower than our and market expectations. Electricity sales rose 26.1 per cent year-on-year to 1884 gigawatt hours due to the contribution of new 520MW projects acquired last year, but utilization hours fell 3-4 per cent year-on-year as lighting was weaker than last year's high base (the highest in nearly 30 years). Subsidy verification has led to a reduction in electricity subsidies for some projects, reducing the average electricity price by more than 1% compared with the same period last year. Electricity in the market accounts for 5%, which is a premium to the benchmark electricity price for coal. In addition, the renminbi depreciated 7.1 per cent against the Hong Kong dollar compared with the same period last year, which also weighed on income growth.

Due to the redistribution of some expenses from administrative expenses to the cost of sales, as well as lower utilization hours and lower subsidies, gross profit margin fell 2.5 percentage points year-on-year to 70.2%. The company has no subsidy in the first half of the year.

The dividend ratio will be halved and the yield on the new project will rise: the company abandoned its previous dividend policy of 90-100 per cent distributable income and paid a dividend based on net profit, with a dividend of HK $0.034 per share in the first half of the year, reducing the dividend ratio to 49 per cent (above 100 per cent in 2020-22), with reference to 45-50 per cent of other Lutheran companies in the future. The main purpose of reducing the dividend ratio is to retain more cash for acquisitions in the current high interest rate environment. In the first half of the year, the company acquired 0.3 gigawatts of parity projects from the parent company, and signed an agreement to acquire 0.6 gigawatts of projects. we expect the total acquisition scale of the company to reach 1 gigawatts this year. At present, the parent company has 2.1 gigawatts of reserve projects available for acquisition, of which 1.8 gigawatts are inexpensive projects. As the price of components has plummeted from 1.9 yuan / watt at the end of last year to less than 1.3 yuan / watt at present, the company expects the rate of return of new grid-connected projects to increase in the second half of the year.

If we start borrowing at low interest rates in the mainland, the average borrowing rate will fall. As a result of continued interest rate hikes in the United States, the company's Hong Kong dollar borrowing rate was close to 6% at the end of June. The company began to borrow in the mainland in the first half of the year, with an interest rate of only 3%, much lower than abroad. The proportion of RMB borrowing by companies reached 14% at the end of June, and the average borrowing rate fell to 5.0%, down 0.5 percentage points from the end of last year. We expect that the proportion of RMB borrowing by companies will further increase, the increase in interest rates in the United States has basically ended, and there will be room for a significant reduction in corporate borrowing rates.

Downgrade to neutral: the company completed a rights issue of 10 per cent equity in May, raising a net HK $1.63 billion, so the sharp reduction in the dividend payout ratio surprised the market and we believe it may bring its price-to-earnings ratio closer to that of state-owned enterprise operators. We lowered our basic earnings per share forecast for 2023-25 by 9-13%. Based on the 2023 forecast price-to-earnings ratio of 14 times (1 standard deviation lower than the historical average of 22 times), we lowered the target price to HK $2.11 (originally HK $3.15), corresponding to the 3.5% forecast dividend yield for 2023, downgrade the rating from buy to neutral.