Guangdong Hydropower is an old leading enterprise in infrastructure construction in Guangdong Province. In January 2023, the reorganization with Guangdong Construction Engineering Group was completed, realizing strong alliance. After the reorganization, the Company has more advantages in qualification, talents, technology and project experience, stronger comprehensive competitiveness, significant growth in new contracts and orders in hand, and more guarantee for future performance growth. In recent years, the Company has focused on the transformation of new energy business, and adopted the investment and construction mode and layout of new energy equipment manufacturing and sales, so as to improve the quality, reduce cost and increase efficiency of power generation operation business. In 2022, the installed capacity of new energy under construction and approved by the Company showed explosive growth. In line with the higher profit level of new energy business, profitability is expected to be further improved in the future, and long-term development is worth looking forward to. We give the target market value of 22.1 billion yuan, the target price of 6 yuan, the first coverage, give "buy" rating.

Company profile: regional infrastructure veteran leader, restructuring completed and new energy. Established in Guangzhou in 2001 and listed on Shenzhen Stock Exchange in 2006, Guangdong Hydropower is an old leader in infrastructure construction in Guangdong Province. At the initial stage of development, it focuses on infrastructure fields such as water conservancy, hydropower and transportation. In recent years, the Company has implemented the development strategy of "one specialty and multiple capabilities", focusing on the development of clean energy power generation and new energy equipment manufacturing and sales, and the revenue of related businesses has continued to grow. On January 6, 2023, the major asset reorganization of the Company and Guangdong Construction Engineering Group was completed, and on the basis of solving the competition in the same industry, the Company absorbed the Construction Engineering Group to realize the strong alliance. This reorganization enabled the company to achieve scale expansion and qualification expansion, and promoted the improvement of comprehensive strength. At the same time, the performance commitment of Construction Group will provide basic guarantee for the performance growth of the company.

Traditional infrastructure: steady growth of infrastructure continues, and the strong in industry competition are stronger. Recent development: The 14th Five-Year Plan of the People's Republic of China builds a modern infrastructure system, pays attention to high-quality development, and plays a leading role in stable growth of infrastructure construction. In the field of traditional infrastructure, we should speed up the construction of a powerful transportation country and strengthen the construction of water conservancy facilities. The planning projects and investment scale of each province in the field of transportation and water conservancy have increased significantly, and the later construction process is expected to accelerate. Industry competition: The competition in the infrastructure industry is more intense, the head concentration trend is obvious, and the central construction enterprises and the head local state-owned enterprises have more competitive advantages. Compared with central construction enterprises, local construction state-owned enterprises are more focused on the province and have more territorial advantages. In recent years, some local state-owned enterprises, including Guangdong Hydropower, have actively promoted mergers and acquisitions to expand their business scale and actively expand the national and new business markets. Under the background of continuous investment in transportation and water conservancy infrastructure, Guangdong Hydropower and other enterprises with rich professional experience and strong strength have more competitive advantages and stronger ones.

New energy projects: favorable policies continue to catalyze market expansion, and construction and power operation create new growth. Under the goal of "double carbon", favorable policies are catalyzing the expansion of new energy engineering market, and the water, electricity and heat part of infrastructure investment has maintained a year-on-year growth of about 20% each month since 2022. The new installed capacity of solar power and wind power in the "14th Five-Year Plan" of each province has increased significantly, creating a broad development space for relevant project construction. We estimate that the new installed capacity of photovoltaic and wind power in China will reach 160GW and 70GW respectively in 2023. At the same time, in order to solve the problem of scenery consumption, the construction of supporting energy storage facilities has become the focus of development. Among them, pumped storage technology is mature and widely applied. However, due to the large scale of the project and high capital cost, only some central construction enterprises and head local state-owned enterprises including Guangdong Hydropower have the ability to carry out construction. At present, the national policy supports the doubling of the scale of pumped storage by the end of the 14th Five-Year Plan, which is expected to create performance growth opportunities for leading enterprises in water conservancy and hydropower construction and operation such as Guangdong Hydropower.

Guangdong Hydropower: New energy project + traditional infrastructure double-wheel drive, new and old advantages jointly promote development speed. Traditional infrastructure:

The company has complete qualifications. After the reorganization, it has the special qualification of general contractor in four major engineering fields such as water conservancy and hydropower, and has the strength to undertake high-quality projects nationwide. The company continued to increase investment in research and development, the number of patents and engineering methods increased rapidly, and its technological innovation capability was excellent. With the support of qualifications, technology and experience, the company has created many high-quality projects and won the most authoritative awards in the construction industry for many times, creating a high-quality brand image.

The company has sufficient orders in hand, with year-on-year growth rates of 269.1% and 5.0% in 2022 and 2023H1 respectively, providing a strong guarantee for future performance. New energy projects: The Company participated in the construction of wind and solar power stations earlier, accumulated rich experience and advantages, and focused on transforming new energy business in recent years. In 2022, the installed capacity of new energy approved and under construction of the Company will increase explosively. We conservatively predict that the operating revenue of new energy power generation of the Company will reach CNY 5.98 billion in 2025. At the same time, the Company actively participated in pumped storage projects and vigorously developed new energy equipment manufacturing. The layout of the whole industry chain and the integrated mode of "investment, construction and operation" are expected to further promote quality improvement, cost reduction and efficiency enhancement. Operating conditions: The Company has strong cost control ability, and the weighted ROE level has increased year by year, reaching 9.5% in 2022. The gross profit margin of the Company's power generation operation business has remained above 55% for many years, contributing 19.9% of gross profit after the reorganization of 2023H1. With the increase in the installed capacity of new energy, combined with the "investment and construction" model and the overall industrial layout, the Company's new energy business is expected to drive the overall improvement of profitability, and the future development is more worthy of expectation.

Risk factors: macroeconomic pressure; double-carbon policy promotion is less than expected; traditional infrastructure industry is declining; industry competition is more intense; the company's new energy installation progress is less than expected; building materials prices fluctuate significantly.

Profit forecast, valuation and rating: The restructuring of the Company and Construction Engineering Group was completed in January 2023, realizing strong alliance, stronger comprehensive competitiveness, significant growth of new signed and on-hand orders, and more guarantee for future performance growth.

In recent years, the Company has focused on the transformation of new energy business, and the installed capacity of new energy under construction and approved by the Company has experienced explosive growth. With the higher profit level of new energy business, the profitability of the Company is expected to be further improved in the future, and the long-term development is worth looking forward to. We forecast that the operating income of the Company in 2023/24/25 will be RMB 97.487/107.53/115.223 billion respectively; the net profit attributable to the parent company will be RMB 17.16/20.42/23.17 billion respectively; and the basic earnings per share will be RMB 0.46/0.54/0.62 respectively. Considering the historical PB valuation of the company and PE valuation of comparable companies, we believe that the reasonable market value of the company is about 22.1 billion yuan, the target price is 6 yuan, and the first coverage is given a "buy" rating.