Event: The company released its 2023 annual report and 2024 quarterly report. In 2023, we achieved revenue of 1,482 billion yuan, an increase of 4.36% year on year; net profit attributable to mother was 4.40 billion yuan (before deducting 4.316 billion yuan), an increase of 25.17% year on year (25.24% after deduction). The profit distribution plan is a cash dividend of 0.4 yuan per share (tax included). The first quarter of 2024 achieved revenue of 258 million yuan, an increase of 2.92% over the previous year; net profit attributable to mother was 1,273 million yuan (before deducting 1,268 million yuan), an increase of 12.06% over the previous year (no increase of 11.88%).

Investment returns have grown rapidly, and the balance ratio has been drastically reduced

In 2023, the company's gross profit margin and net interest rate were 46.37%, 304.07%, +7.86pct, +52.57pct; the period expense ratio was 59.58%, +6.05pct; ROE (weighted) 12.63%, +1.83 pct; net operating cash flow was 591 million yuan, down 2.91% year on year; achieved investment income of 4.813 billion yuan, up 22.94% or 898 million yuan, with investment income of Yalong River, Dadu River and CNNC Huineng increased by 602 million yuan, respectively. $150 million, $122 million.

The company's gross profit margin and net margin for the first quarter of 2024 were 44.28%, 498.30%, +3.85pct, +40.93pct; the period expense ratio was 58.17%, -20.97pct; ROE (weighted) 3.23%, -0.07pct; net operating cash flow of 177 million yuan, up 36.38% year on year; achieved investment income of 1,328 billion yuan, up 6.14% or 0.77 billion yuan year on year. The company's balance ratio in the first quarter was 31.80%, -6.90pct year on year, far below the level of about 60% for Changjiang Electric Power and Huaneng Hydropower.

The rise in electricity prices affects the depletion of incoming water. From 2024, the water is expected to improve the overall withering of incoming water throughout 2023. The Yalong River generates 84.2 billion kilowatt-hours (-4.8% YoY), and the Dadu River generates 45.2 billion kilowatt-hours (-2.4% YoY). Benefiting from factors such as rising electricity prices for Jinguan power packs in Jiangsu, the commissioning of the Lianghekou Hydropower Station, and rising market-based electricity prices in the province, the average feed-in price of the Yalong River in 2023 was 0.310 yuan/kilowatt-hour (+11.1% year over year). It is expected that the Dadu River feed-in tariff will also rise. The rise in electricity prices affected the drying up of incoming water. In 2023, the Yalong River's investment income was 4.156 billion yuan (+17.6% or +602 million yuan), and the investment income of the Dadu River was +150 million yuan year-on-year.

The company's investment revenue for the first quarter of 2024 was 1,328 billion yuan (+6.14% year over year), and we expect to benefit from improved incoming water. According to data from the Sichuan Hydrology and Water Resources Survey Center, incoming water from the Yalong River and Dadu River from January to January 2024 was 30-50% higher than year-round, and incoming water is expected to continue to improve throughout the year.

The main business achieved multiple breakthroughs, and installed equity continued to grow

The company is actively expanding investment projects in the main business, completing the delisting and acquisition of 10% of Guoneng Daduhe Company's shares in 2023; successfully delisted the 51% equity project of Guangxi Rong'an Yuchai New Energy Company, adding 100,000 kilowatts of installed capacity; successfully selected market-based competitive investment and development entities for the Pingshan Pumped Storage Power Station project. It initially plans to install 1.2 million kilowatts. The total investment period is 77 months, and the company holds 96-98% of the shares.

By the end of 2023, the total installed capacity of the company's shareholding reached 36.53 million kilowatts (excluding Three Gorges Energy, CGN Wind Power, and China Nuclear Power), with 16.14 million kilowatts of equity installed capacity, an increase of 17.5% over the previous year; in 2020-2023, the compound installed growth rate of equity was 18.2%, driving up the investment income center.

The Yalong River hydropower installation has room for growth of more than 50%, and the Yalong River Hydropower Company, which has a 40GW long-term plan to take 48% of the shares, has exclusive development rights in the Yalong River, the country's third-largest hydropower base. The watershed has abundant and stable water resources. Over the years, the average number of hours used has been around 4,800 hours, far higher than the national average of 3,600 hours and the 4,300 hours in Sichuan Province, and there is little change in incoming water from year to year. Currently, 19.2 GW of hydropower has been put into operation, and 3.72 GW under construction is expected to be put into operation in the 15th. The total long-term plan is 30 GW, and there is 56% room for hydropower growth. The Yalong River has broad scope for integrated growth. The coastal scenery of the watershed can be developed more than 40 GW, and more than 1.6 GW has been put into production by the end of 2023. According to the plan, it is estimated that production of new energy will reach 20 GW, 30 GW, and 40 GW in 2030, 2035, and 2050, respectively.

The increase in Dadu River's installed capacity is clear, and it is expected to usher in a sharp rise in volume and price

Guoneng Daduhe Company, which has a 20% stake, has put into production about 11 GW of hydropower, and is expected to start producing 3.52 GW around 2025.

The Dadu River Basin has always had serious wastewater disposal, and the water energy utilization rate is low. Among them, 10.7 billion kilowatt-hours were discarded in 2020, accounting for 53% of the amount of wasted water and electricity in Sichuan Province, and 35% of wasted water and electricity in major watersheds in the country. With the construction of UHV in Sichuan and Chongqing and the construction of the Shuangjiangkou Hydropower Station with annual regulation capacity, water waste will be mitigated. The rapid economic development of Sichuan Province is driving strong demand for electricity. Since the 13th Five-Year Plan, the compound GDP growth rate of Sichuan Province in 2016-2023 was 6.5%, higher than the compound growth rate of 5.7% of the national GDP during the same period; in 2016-2023, the compound growth rate of electricity consumption in Sichuan was 9.3%, higher than the 6.8% compound growth rate of power generation in Sichuan Province during the same period. Since the power supply structure in Sichuan Province is mainly hydropower, the increase in installed capacity is limited, and it is easily affected by fluctuations in incoming water, it is expected that overall supply and demand will be tight year by year.

Against this background, market-based hydropower prices in Sichuan have risen markedly. Among them, the average annual increase since the 14th Five-Year Plan was 0.012 yuan/kilowatt-hour, and electricity prices have grown at a compound rate of 5.5%.

Valuation analysis and rating instructions:

The company's net profit for 2024-2026 is estimated to be 4.942 billion yuan, 5.520 billion yuan, and 5.949 billion yuan respectively. The corresponding PE is 15.6 times, 14.0 times, and 13.0 times, respectively, maintaining the “recommended” rating.

Risk warning:

The risk that incoming water volume falls short of expectations; the risk of feed-in tariffs being lowered; the risk that construction of new energy projects falls short of expectations.