The net profit from 2023H1 was 913 million yuan, down 52% year on year. The main reason is that incoming water from the Hongshui River Basin was about 40% lower than the average for many years, causing the company's hydropower generation to decrease 41% year on year and gross profit in the hydropower sector to decrease 59% year on year; the rebound in electricity demand led to a high increase in thermal power generation, but 23H1 fuel costs were still high, causing losses in the thermal power sector; the green power sector grew steadily. 23H1 wind power generation and gross profit increased 19%/13% year on year. It is expected that the company's cash flow from the Hongshui River with hydropower contributions will revolve around 19%/13% year on year. The watershed accelerates the development of landscape projects, Increase the room for profitable cash flow to grow. We expect the company's EPS to be 0.25/0.40/0.40 yuan respectively from 2023 to 2025, maintain the company's “buy” rating, and target price is 6.70 yuan.

The net profit of 2023H1 was 913 million yuan, and the performance fell short of expectations. The company 23H1 achieved operating income of 4.155 billion yuan, down 26.1% year on year; net profit of 913 million yuan, down 52.0% year on year; corresponding EPS of 0.11 yuan, down 53.0% year on year, and performance was lower than expected. On a quarterly basis, 23Q2 achieved operating income of 2.160 billion yuan, a year-on-year decrease of 28.9%; net profit of 619 million yuan, a year-on-year decrease of 45.9%; converted EPS of 0.08 yuan, a year-on-year decrease of 46.7%.

The lack of incoming water is dragging down performance, and coal and electricity profits are still under pressure. Incoming water from the Hongshui River Basin, where major hydropower projects such as Longtan and Yantan are located, which are controlled by 23H1, is about 40% less than the average for many years. As a result, the company's hydropower generation capacity decreased by 41.0% year on year to 11.33 billion kilowatt-hours, and the gross profit of the hydropower division decreased by 58.7% year on year to 1.27 billion yuan.

Although benefiting from a rebound in electricity demand, the power generation capacity of the Heshan Thermal Power Plant controlled by 23H1 increased 97.5% year on year to 2.17 billion kilowatt-hours, but overall coal prices remained high in the first half of the year, causing the thermal power sector to continue to lose money. The gross profit loss narrowed by only 29 million yuan to -80 million yuan year on year.

The green power sector is developing steadily and is expected to continue to contribute to increased performance. The company is actively accelerating the growth of wind and solar installations through self-construction and acquisitions. By the end of 23H1, the scale of wind power/photovoltaic installations put into production by the company was 76.6/357,000 kilowatts, respectively. In the first half of the year, the company completed a total of 1.01 billion kilowatt-hours of wind power generation, an increase of 19.4% over the previous year. The gross profit contributed by the wind and wind sector increased 13.4% year on year to 330 million yuan. Currently, the company is relying on the Hongshui River Basin to develop multi-energy complementary water and landscape projects. At the same time, it is actively obtaining various landscape resources through various channels to accelerate the growth of the green power sector. Considering that the company's ability to obtain cash flow is stable and the balance ratio continues to be low, it is expected that the company will continue to invest in and build new energy projects to increase the room for profit cash flow growth.

Risk factors: the company's incoming water and power generation are lower than expected; the company's feed-in tariffs are lower than expected; the return on the company's new landscape projects falls short of expectations.

Profit forecast, valuation and rating: Considering that incoming water from basins such as the Hongshui River where 23H1's hydropower installations are located is generally dry, we lowered the electricity volume assumption and adjusted the company's net profit forecast for 2023 to 2.0 billion yuan (previous forecast value was 2.35 billion yuan). At the same time, after assuming the company's average incoming water intake for 2024 to 2025, the net profit forecast for the new company from 2024 to 2025 was 31.5/3.15 billion yuan, respectively. The corresponding EPS forecast for 2023-2025 was 0.25/ 0.40/0.40 yuan. The company's current stock price corresponds to 22/14/14 times PE from 2023 to 2025, respectively. We gave the company 2.7 times the target PB in 2023 based on the average PB value of the company over the past five years, corresponding to the target price of 6.70 yuan, and maintained the “buy” rating.