Under a high base, Yalong River Hydropower's profit continued to grow. The 1Q24 Company's performance exceeded expectations of the company's 23-year operating income/net profit of 1,482/44 billion yuan, +4.4%/+25.2% YoY; 1Q24's operating revenue/net profit to mother was 258.1.273 billion yuan, +2.9%/+12.1% YoY, exceeding our expectations of 10.38-1,268 million yuan. We believe the main reason is that Yalong River Hydropower's performance exceeded expectations.

The company's 23-year DPS was 0.40 yuan, corresponding payout ratio of 44.31%. To raise the share of photovoltaics in Yalong River Hydropower's future new energy installations, we lowered the company's net profit forecast for 24-25 to 35.5 billion yuan (previous value: 54/5.9 billion yuan), and introduced a 26-year forecast of 5.8 billion yuan. Referring to a 24-year average PE17.6x, the comparable company Wind is optimistic that the Lianghekou Longtou Reservoir Power Station will bring long-term value increases to the downstream growth effect and integrated water landscape development of the Yalong River. The company was given a target PE of 19.5x in 24 years, corresponding to a target price of 21.33 yuan (previous value: 20.74 yuan), maintaining a “buy” rating.

The Tianwan River Hydropower Station resumed power generation in 2023, and the Dadu River's investment revenue contributed +150 million yuan year-on-year. In 2023, the company controlled hydropower achieved a feed-in capacity of 4.913 billion kilowatt-hours, or +6.39% over the same period. The main reason is that Tianwan River Company's power generation capacity returned to normal after completing the dam leak treatment project. In 1Q24, benefiting from the year-on-year increase in incoming water from the watersheds where some of the holding hydropower stations are located, the company's hydropower feed-in capacity was +12.82% to 739 million kilowatt-hours; the hydropower feed-in price was +0.35% to 0.283 yuan/kilowatt-hour compared to the same period last year.

The Guiping photovoltaic power plant acquired by the company in August 2022 was consolidated, which prompted the company's PV feed-in power to +175% to 231 million kilowatt-hours in 2023. However, due to the participation of some photovoltaic power in market-based transactions, its feed-in electricity price was -1.11% to 0.623 yuan/kilowatt-hour compared to the same period. In 2023, the company's shareholding ratio in Dadu River Hydropower increased to 20%, so the company's investment income from Dadu River was +150 million yuan year-on-year.

We continue to be optimistic that the volume and price of hydropower in the Yalong River will rise rapidly. The integrated water and landscape development is the icing on the cake. In 2023, the Yalong River hydropower feed-in capacity was -4.86% to 83.766 billion kilowatt-hours, but the average feed-in price was +11.11% to 0.310 yuan/kWh, mainly due to the rise in electricity prices delivered by Jinguan power packs to Jiangsu and the market-based electricity price of hydropower in Sichuan Province; therefore, Yalong River Hydropower contributed +602 million yuan to the company's investment revenue year over year. In 1Q24, the company achieved investment income of 1,325 billion yuan in joint ventures, +87.09 million yuan; the Yangtze River Hydrological Network revealed that as of the end of December 2023, the Yalong River estuary/Jinping 1st level/2nd beach water storage volume decreased by 11.17/1.74 billion square meters year on year, and Q1 power generation was mainly due to energy storage release. Therefore, we expect 1Q24 Yalong River hydropower generation to decline year on year. The increase in performance may be due to a year-on-year increase in feed-in tariffs. The Yalong River can be expected to grow in future water and wind pumping capacity.

Target price of 21.33 yuan, maintaining “buy” rating

We estimate that the company's net profit for 24-26 years will be 53/55,58 billion yuan (of which we expect the Yalong River hydropower investment to contribute 51.5/53.4/5.50 billion yuan), corresponding to EPS of 1.09/1.14/1.18 yuan. According to comparable company Wind, the average value of 24E PE is 17.6x, giving the company 19.5 x 24E PE, with a target price of 21.33 yuan.

Risk warning: The amount of hydropower generation fell short of expectations due to dry incoming water; feed-in tariffs for hydropower fell short of expectations.