Key points of investment:

Incident: The company released its 2023 annual report. Net profit attributable to mother was 8.446 billion yuan (without deducting interest on perpetual bonds for the whole year), net profit attributable to common shareholders of 5.529 billion yuan after deducting interest on perpetual bonds, and a proposed dividend of 0.2 yuan/share. The company drastically reversed losses but still fell short of our expectations. The figure for the same period last year was a loss of 7.387 billion yuan.

The recovery of coal and electricity profits for the full year of 2023 fell short of expectations, and there is huge room for restoration. According to the segmented performance disclosed in the company's annual report, the company achieved total pre-tax profits of 4.33 million yuan and 777 million yuan in 2023, and the figures for the same period last year were -173.25 and 575 million yuan respectively. The reversal of losses in the coal and electricity sector was mainly due to a sharp drop in coal prices and a year-on-year increase in coal machine usage hours. In 2023, the company's coal-fired electricity trading price was 481.01 yuan/megawatt-hour, up 21.19% from the benchmark electricity price. At the same time, the fuel cost per unit of electricity sold by domestic thermal power plants was 326.43 yuan/megawatt-hour, a year-on-year decrease of 12.38%, driving a rapid recovery in coal power performance. The company's coal and electricity sector reversed year-on-year losses, but in 4Q23, the net profit of this sector was -3003 billion yuan, and the performance was still far below expectations. It was mainly due to the sharp rise in coal prices during the quarter and depreciation of some coal and power assets. According to Wind data, the average price of 5,500 kcal thermal coal in Qinhuangdao reached 957.69 yuan/ton in 4Q23, an increase of 10.56% over 3Q23. Although the profitability of the company's coal and electricity sector still largely depends on coal price trends, in the context of the gradual improvement of the market mechanism to accelerate electricity reform, coal power gradually switches from baseload power to functional power sources. The auxiliary service market and capacity electricity price mechanism will help stabilize the profitability of coal power over the long term. In 2023, the company achieved a net revenue of 22.23/495 million yuan from peak-shifting/FM auxiliary services. In 2024, the company signed an annual Changxie electricity price with only a slight year-on-year decline, compounding the ancillary service market and institutional guarantees for capacity electricity prices. If coal prices continue to maintain a moderate downward trend, we believe that the profitability of the company's coal and electricity sector has room for significant restoration.

Wind power performance declined, and PV carried the company's new energy profit growth banner. In 2023, the company added 8858,900 kilowatts of new energy, including 2,033,200 kilowatts (-34.20% YoY) and 6.8257 million kilowatts (+120.21%) of wind power and photovoltaics respectively. The annual pre-tax profits of wind power and photovoltaics reached 59.13 billion yuan and 2,044 billion yuan, up -5.16% and 78.08%, respectively. The main reason for the decline in wind power sector performance is an increase in affordable wind power projects and an increase in market operating costs such as peak and frequency modulation of power systems, etc., while photovoltaic performance continues to grow rapidly in the face of rapid expansion in the scale of installed capacity. By the end of 2023, the total installed capacity of the company's wind and solar power was 28.611 million kilowatts. Considering the current decline in the prices of fan equipment and photovoltaic modules, the company is expected to accelerate the pace of new energy installations in 2024-2025, guarantee the share of clean energy installed, and achieve the “14th Five-Year Plan” new energy plan target of more than 40 million kilowatts of wind power and photovoltaic installations.

LPR continues to decline, and the company's financial expenses are expected to continue to decline. In 2021-2022, the company's balance ratio increased rapidly from a low in 2020 against the backdrop of a sharp loss in performance and a gradual increase in new energy expenditure. The company's operating performance improved in 2023, reducing the balance ratio from 74.82% to 68.33% through repayment of short-term loans and bonds payable by the company. In 2023, China's LPR for 5 years or more fell by 10BP, the capital cost of the company's interest-bearing debt fell, interest expenses decreased by 10.2 billion yuan year on year, and financial expenses decreased 7% year on year. LPR fell another 25BP in 2024, helping the company continue to reduce financial expenses.

The overseas business performed well, and the Singapore business performance exceeded expectations. Dazhi Energy, which is wholly owned by the company in Singapore, has a share of 20.4% of the local annual power generation capacity, and its market position is stable. In 2023, Dazhi Energy's power generation capacity was 11.271 billion kilowatt-hours, a year-on-year decrease of 1,084 billion kilowatt-hours, but the total profit reached 4.355 billion yuan, an increase of 131.90% over the previous year, mainly due to the company's optimization of fuel supply structures and methods and active expansion of the electricity retail market. The company's subsidiary in Pakistan is also doing well, achieving revenue of 4,061 billion yuan and profit of 605 million yuan in 2023. The profitability of overseas market projects is stable, and the company's performance is continuously enhanced.

Profit forecast and valuation: Considering that the coal price center is still high, and some old coal mills face the risk of discontinuation of production, etc., we lowered the company's 2024-2025 net profit forecast to 115.33, 137.58 (previous values were 148.55, 18.946 billion yuan), and the net profit forecast for 2026 was 16.641 billion yuan (the above forecasts include interest on perpetual bonds). The current stock price is 12, 10 times, and 9 times PE for 2024-2026, respectively. Based on the significant improvement in the company's cash flow, the decline in coal prices since '24, and the continuation of the trend of high growth in new energy installed capacity, the “increase in holdings” rating was maintained.

Risk warning: Electricity system reform falls short of expectations, adverse changes in electricity price policy, risk of coal price fluctuations