Core views:

Hydropower is the main business, and self-construction and mergers and acquisitions drive continuous growth in installed capacity. The company adheres to the “one main, two auxiliary” industrial layout, with hydropower as its core business, and relies on basins such as the Yalong River, Dadu River, and Tianwan River, which have unique resource advantages, to carry out project development in the form of a combination of shareholding and holding. As of the first half of 2023, the company's equity installed capacity was 14.82 GW, and the holding installed capacity was 1.41 GW. Since the 14th Five-Year Plan, benefiting from the successive commissioning of the Yalong River Lianghekou and Yangfanggou Power Station, a 10% increase in Guoneng's shares in Dadu River, and the acquisition of 6.4% of CNNC HuiNeng's shares, installed equity has continued to grow, with a compound growth rate of 18% in the first half of 2021-2023.

The Yalong River hydropower installation has room for growth of more than 50%, and 40 GW of new energy is planned in the long term. The Yalong River Hydropower Company, which has a 48% share, has exclusive development rights for the Yalong River, the country's third-largest hydropower base. The watershed has abundant and stable water resources. Over the years, the average number of hours used has been around 4,800 hours, far higher than the national average of 3,600 hours and the 4,300 hours in Sichuan Province, and there is little change in incoming water from year to year. Currently, 19.2 GW of hydropower has been put into operation, and 3.72 GW under construction is expected to be put into operation in the 15th. The total long-term plan is 30 GW, and there is 56% room for hydropower growth. The Yalong River has extensive space for integrated growth, and the coastal scenery of the watershed can be developed in excess of 40 GW.

As of the first half of 2023, 1 GW of Kela PV has been put into operation, and 1.43 GW of scenery is under construction. According to the plan, it is estimated that production of new energy will reach 20 GW, 30 GW, and 40 GW in 2030, 2035, and 2050, respectively.

The increase in Dadu River's installed capacity is clear, and it is expected to usher in a sharp rise in volume and price. Guoneng Daduhe Company, which has a 20% stake, has put into production about 11 GW of hydropower, and is expected to start producing 3.52 GW around 2025. The Dadu River Basin has always had serious wastewater disposal, and the water energy utilization rate is low. Among them, 10.7 billion kilowatt-hours were discarded in 2020, accounting for 53% of the amount of wasted water and electricity in Sichuan Province, and 35% of wasted water and electricity in major watersheds in the country. With the construction of UHV in Sichuan and Chongqing and the construction of the Shuangjiangkou Hydropower Station with annual regulation capacity, water waste will be mitigated. The rapid economic development of Sichuan Province is driving strong demand for electricity. Since the 13th Five-Year Plan, the compound GDP growth rate of Sichuan Province in 2016-2023 was 6.5%, higher than the compound growth rate of 5.7% of the national GDP during the same period; in 2016-2023, the compound growth rate of electricity consumption in Sichuan was 9.3%, higher than the 6.8% compound growth rate of power generation in Sichuan Province during the same period. Since the power supply structure in Sichuan Province is mainly hydropower, the increase in installed capacity is limited, and it is easily affected by fluctuations in incoming water, it is expected that overall supply and demand will be tight year by year. Against this background, market-based hydropower prices in Sichuan have risen markedly. Among them, the average annual increase since the 14th Five-Year Plan was 0.012 yuan/kilowatt-hour, and electricity prices have grown at a compound rate of 5.5%.

The balance ratio is lower than that of industry leaders, and there is still room for improvement in dividends. As of the third quarter of 2023, the company's balance ratio was less than 40%, far below the level of about 60% for Changjiang Electric Power and Huaneng Hydropower. According to the company's “Shareholder Return Plan for the Next Three Years (2023-2025)”, the cash dividend for every 10 shares is not less than 4 yuan (tax included). Based on current share capital, the total annual dividend will not be less than 1.95 billion yuan, which will continue to grow from 1,784 billion yuan in 2022. In the long run, as holdings and shares participate in the construction and operation of installed machines one after another, the company's cash recovery capacity will be further enhanced, and there is still room for further improvement in dividends.

Investment advice: The company's net profit for 2023-2025 is estimated to be 44.04/49.13/5.521 billion yuan, respectively. The corresponding PE is 15.9x/14.2x/12.7x, which is lower than the comparable company average of 19.2x/17.1x/15.9x; the company's current PB is 1.96x, which is lower than the comparable company average of 2.72x. The company has high-quality resources such as the Yalong River and the Dadu River. The water and landscape complement each other and have outstanding growth. Compared with other hydropower taps, the valuation advantage is obvious, and it maintains a “recommended” rating.

Risk warning: risk of incoming water falling short of expectations; risk of feed-in tariff reduction; risk of new energy project construction falling short of expectations.