Incident: On the evening of March 29, Guangdong Electric Power A announced its 2023 results. In 2023, the company achieved operating income of 59.708 billion yuan, an increase of 13.38% over the previous year; achieved net profit of 975 million yuan to mother, turning a loss into a profit. The company achieved revenue of 14.533 billion yuan in a single quarter in 23Q4, up 10.31% year on year and 13.67% month on month. Due to the impact of depreciation of 1,292 million yuan, 23Q4 achieved net profit to mother - 752 million yuan, a year-on-year loss of 532 million yuan.

Comment:

Thermal power sector: Remarkable results in reducing costs and increasing efficiency, have profitability recovered? 1) Installed capacity and electricity capacity: Continuing to increase coal and electricity projects, electricity demand continues to grow. In 2023, the company is constructing 126.742 million kilowatts of thermal power. In 2023, the thermal power sector added 667,000 kilowatts of gas and coal replacement projects in Yuehua; 460,000 kilowatts of the Zhaoqing Dinghu natural gas project from January to January 2024; and 665,000 kilowatts of the Huizhou Daya Bay Petrochemical Zone Comprehensive Energy Station project. We expect that the thermal power units under construction by the company are expected to be intensively put into operation between 2024-2026, bringing room for growth in the thermal power sector. At the same time, benefiting from the continuous increase in demand for electricity consumption in Guangdong, the company's electricity sales have steadily increased. In 2023, the company completed a total of 114.150 billion kilowatt-hours of thermal power generation, an increase of 5.03% over the previous year; of these, coal power completed 95.639 billion kilowatt-hours, an increase of 2.15% over the previous year, and completed 18.511 billion kilowatt-hours of gas and electricity, an increase of 23.09% over the previous year.

2) Electricity prices: It benefited from the peak rise in electricity prices in Guangdong in '23, but faced downward pressure on electricity prices in '24. In the company's electricity sales structure, Changxie's electricity sales account for about 70% of the annual electricity sales volume, and monthly and spot transactions such as purchasing electricity on behalf of others account for about 30%. In 2023, Guangdong's annual electricity transaction price rose to a peak, helping the company improve its revenue side significantly against the backdrop of long-term cooperation being able to lock in most revenue in the year.

In 2023, the company's thermal power feed-in price was 0.58 yuan/kilowatt-hour (tax included), up 0.4 yuan/kilowatt-hour year on year, up 7.41% year on year. However, according to the transaction results announced by the Guangdong Electric Power Trading Center in December 2023, the average transaction price of the 2024 annual bilateral negotiation transaction, annual listing transaction, and annual concentrated competition transaction decreased year-on-year. Among them, the bilateral negotiated electricity volume was 243.114 billion kilowatt-hours, and the average transaction price was 465.64 yuan/kilowatt-hour (tax included, same below), down 88.24 yuan/kilowatt-hour from the previous year. Electricity prices are falling in the medium- to long-term market in Guangdong Province, and the company is facing downward pressure on electricity prices in 2024. The company is expected to reduce the negative impact of falling electricity prices through continuous optimization of electricity market trading strategies.

3) Cost: Benefiting from the year-on-year decline in the average price of coal at home and abroad, the reduction in fuel costs. The company's coal cooperation ratio is low, and imported coal accounts for a relatively high proportion. Benefiting from the year-on-year decline in the average price of domestic and foreign coal in 2023, especially the sharp decline in imported coal prices, the company saw a significant year-on-year improvement in fuel costs in 2023. In 2023, the company's annual fuel cost for power generation was 40.266 billion yuan, a year-on-year decrease of 6.90%; in 2023, the fuel cost for thermal power generation was 0.353 yuan/kilowatt-hour (excluding tax), a year-on-year decrease of 11.31%. Looking ahead to 2024, the company is expected to further control various costs and expenses, control fuel procurement costs, and drive a further reduction in coal-fired power generation costs.

Green electricity sector: Installed electricity has increased quite a bit, and there is plenty of room for growth in the two years after the 14th Five-Year Plan.

1) Installed electricity capacity: In 2023, the installed capacity and electricity volume of the company's new energy sector increased quite significantly. Among them, the installed capacity of wind power increased by 450,000 kilowatts, an increase of 19.19% over the previous year, and the installed capacity of photovoltaics increased by 1.773 million kilowatts. In terms of feed-in power, wind power completed 4.718 billion kilowatt-hours, an increase of 14.63% over the previous year; photovoltaics completed 376 million kilowatt-hours, compared to 03 billion kilowatt-hours in the same period last year. 2) Electricity prices: In 2023, the company's wind power sector achieved a feed-in price of 0.70 yuan/kilowatt-hour (tax included), a year-on-year decrease of 4.11%; the photovoltaic sector achieved a feed-in price of 0.30 yuan/kilowatt-hour (tax included), a year-on-year decrease of 44.44%. 3) Outlook: According to the company's plan, the “14th Five-Year Plan” energy installed capacity growth space is expected to reach 14 million kilowatts. In terms of wind power, Guangdong has good endowments in ocean wind resources. In August, Guangdong Wind Power Co., Ltd., a wholly-owned subsidiary of the company, plans to increase capital and expand shares through public listing. We believe that the company's offshore wind power installations are expected to accelerate before the province makes up for the decline. In terms of photovoltaics, the company's photovoltaic sector has developed since the beginning of the 14th Five-Year Plan. Benefiting from the recent rapid decline in PV module prices, the company's PV installed capacity is expected to increase at an accelerated pace. At the same time, significant improvements in the company's thermal power sector profits and cash flow may help the construction of green power installations.

Profit forecast and valuation: Due to the fall in electricity prices in Guangdong in 2024-2026, we lowered the company's net profit forecast for 2024-2026 to 2,025 billion yuan, 2,783 billion yuan, and 3.445 billion, respectively, with year-on-year growth rates of 107.8%/37.4%/23.8%; PE corresponding to the closing price of 5.17 yuan on March 29 was 13.40/9.75/7.88 times, respectively, maintaining the “gain” rating.

Risk factors: domestic and foreign coal prices have risen sharply again; the pace of expansion and construction of the company's new energy projects falls short of expectations; the market-based reform of the Guangdong Electric Power Company falls short of expectations.