Earnings in 2023 fell short of expectations, but dividends were a surprise. The profit attributable to equity holders of the company in 2023 rose 7% year-on-year to 2.66 billion yuan (RMB, same below), lower than our expectations/market expectations of 31%/22%, mainly due to higher operating costs than expected. The factors include: (1) the hydropower sector 2H23 recorded an operating loss of 300 million yuan due to the lowest water intake in the past 15 years (vs expected profit of about 200 million yuan); (2) labor costs were about 40% higher than expected; and (3) other expenses were higher than expected by about 48% due to amortization of intangible assets and operating costs related to power generation. Although profit growth fell short of expectations, due to management's expectations of rapid profit growth in 2024, the company increased its dividend per share to $0.132 (up 20% year over year), and the dividend ratio increased from 55% in 2022 to 61% in 2023.
The addition of self-built projects has slowed slightly, leaving room for acquisitions. After a sharp increase of 13 gigawatts of clean energy installed last year, the company expects to slow down to 7 gigawatts (4.5/2.5 gigawatts for wind and light) this year, and the capital expenditure is expected to be kept below 30 billion yuan. In addition, management indicated that they prefer to keep coal-fired electricity installations that are consolidated. Management is still hoping to achieve the goal of reaching 90% of clean energy installations by the end of 2025. Analyzing the above factors, we believe that the company has reserved room to acquire the parent company's renewable energy assets. It is expected that without an acquisition project, the company's net debt/total equity ratio will rise 3 percentage points to 170% year on year, down from the peak of 190% in 2021. It is estimated that the company may still carry out acquisitions without equity financing.
It is expected that profits in the landscape sector will be significant in 2024, and the hydropower sector is expected to reverse losses. Looking ahead to 2024, management can significantly unleash profits from the scenery projects that were greatly added last year. We estimate that the operating profit of the wind/light sector will increase by 61% year on year. Regarding profit recovery in the hydropower sector, management believes that the recovery of incoming water is progressing well in the current first quarter. We estimate that utilization hours will rise from 2,166 hours last year to 2,750 hours this year (the average value for the period 2020-22 is 3917 hours), returning to a profit level of about 100 million yuan (compared to a net loss of 500 million in 2023). In summary, after considering current operating costs and utilization hours in the hydropower sector, we lowered the 2024/2025 profit forecast by 41%/36%, and expect the company's net profit to increase by 70%/44% year-on-year in 2024/2025.
The increase in dividends per share in 2024 is still clear, and monthly data will play a key role in increasing the valuation. Regarding the dividend rate in 2024, management expects to reduce the dividend ratio from 61% in 2023 to about 50%, but the 2024 dividend per share is still expected to increase by 38% to $0.182. Our segmental valuation has been adjusted as follows: (1) the base year was changed to 2024; (2) the valuation benchmark for the wind/light sector was lowered to 8.5 times the price-earnings ratio in 2024 due to the reduction in the valuation of the Hong Kong stock operator sector in the past 6 months. Our target price was slightly reduced to HK$3.90 (previously HK$4.06). Maintain a buy rating. We believe that the company's current monthly operating data can better grasp the recovery of the hydropower sector and changes in the electricity limit rate in the landscape sector, which will play a key role in improving the valuation. At the same time, it is expected that the increase in dividends in 2024 will also support the stock price to a certain extent.