Net profit for 2023 was -44% year-on-year. The profit forecast and target price were lowered. In 2023, South Grid Energy released its annual report, achieving revenue of 3 billion yuan (yoy +3.5%), net profit of 311 million yuan (yoy -44%), after deducting non-net profit of 306 million yuan (yoy -41%), and net profit lower than Huatai's forecast (555 million yuan), mainly due to significant losses in biomass projects. Among them, Q4 achieved revenue of 792 million yuan (yoy +5%) and net profit of -36 million yuan (yoy -121%) to mother. According to the company's new development projects, the number of new PV installations was lowered and the building energy saving service area was raised; according to the profit forecast, we expect the company's EPS to be 0.11/0.14/0.18 yuan (previous value 0.21/0.27/- yuan) for 24-26, and the core EPS after excluding biomass losses would be 0.19/0.23/0.26 yuan. Comparable company Wind agreed to have an average PE value of 22 times. The company's 24-25 EPS CAGR (33%, 66% if the biomass business is successfully divested) was higher than that of comparable companies (+29%), giving the company 51 times PE in 24 years (30 times the core EPS), and a target price of 5.70 yuan (previous value of 6.67 yuan), maintaining a “buy” rating.

Distributed PV was put into production +37% year-on-year, and is expected to continue to grow at a high rate of +23% to 1.47 billion yuan in 2023, with distributed PV revenue +21% YoY to 1.49 billion yuan, of which distributed PV revenue was +21% YoY to 1.19 billion yuan, thanks to the continuous expansion of distributed PV installed capacity. At the end of 2023, the company's distributed photovoltaics installed 1,866 MW, adding 506 MW of installed capacity, corresponding to a year-on-year increase of 37%. Taking into account increased competition in the industry and fluctuations in customer demand, the company actively adjusted the pace of industrial and commercial photovoltaic project development. In 2023, the new reserve installed capacity (through investment decisions) was -3.2% to 891 MW; however, the decline in 4Q23 PV module prices reduced investment costs (-18% per watt, -10% month-on-month), and the company's new reserve installed capacity was +9% to 381MW. We expect the company's ongoing projects to be put into operation and contribute to performance over 24 years, helping the company maintain its leading position in the industry.

Building energy saving service area was +20% year over year, and the company's building energy efficiency revenue in 2023 in collaboration with distributed photovoltaics was +18% to 90 million yuan, thanks to +20% compared to 9.82 million square meters of building energy saving service area. The company may significantly benefit from the release of demand for energy-saving renovation of buildings across the country, and there is a certain overlap between energy-saving building customers and distributed photovoltaic customers, providing the company with a competitive advantage from rivals in developing the two businesses. We are optimistic that the company's building energy efficiency revenue will continue to grow rapidly in 24-26 years.

Withdrawing from non-advantageous fields and extending to smart energy services and load aggregation, the company's comprehensive resource utilization revenue in 2023 was -40% to 390 million yuan, and gross margin was -45pp to -19% year-on-year. The main reason was that biomass projects experienced large losses. The total net loss of the two major holding subsidiaries was 343 million yuan. The company has made it clear that it will withdraw from non-advantageous fields, including biomass projects, and seek new profit growth points: 1) cooperate with territorial resources to vigorously develop decentralized wind power; 2) seize development opportunities in the power-assist market and extend it to load aggregators.

Risk warning: The scale of new PV installations falls short of expectations; the development of new PV projects falls short of expectations; risk of defaulting on renewable energy subsidies; the economic benefits of contract energy management projects during the service period are uncertain.