Earnings in 2023 fell short of expectations. China Electric Power (the “Company”) reported profit of RMB2.66 billion for 2023, lower than our expectations, mainly due to recorded asset amortization of RMB 650 million and losses of RMB 826 million in the hydropower sector, both higher than our expectations. The company announced a dividend DPS of RMB 0.13 per share for 2023 (RMB 0.11 in 2022). China Electric Power raised its dividend payout ratio to 61% in 2023 (up from 55% in 2022), with a dividend of RMB 0.13 per share (up from RMB 0.11 in 2022). We believe this reflects management's confidence in earnings growth in 2024 and its intention to maintain stable dividends.
The thermal power business became a cash cow: In 2023, China Electric Power's thermal power business turned a loss into a profit, achieving a profit of RMB 1,315 billion (loss of RMB 1,391 billion in 2022). Driven by an accelerated decline in unit fuel costs, the average ignition spread in 2023 increased from RMB 82 per MWh to RMB 111 per MWh in 2022. China's power management believes that, benefiting from a further 3-5% reduction in unit fuel costs, ignition price spreads are expected to improve further in 2024. After turning losses into profits, China Electric Power's thermal power business should become a cash cow in terms of new energy expansion and dividend payments.
Prudent and steady expansion of renewable energy: In 2023, China Electric Power added a total of 13.4 gigawatts of renewable energy installed (including 7.5 gigawatts of asset injection). The company aims to achieve 7 gigawatts of organic growth in installed new energy by 2024, which means that clean energy will account for 78.7% of total power generation by the end of the year. Thanks to the reduction in the cost of new energy equipment, the 2024 capital expenditure budget was set at less than RMB 30 billion, which is the same as the previous year.
China Electric Power's management remains committed to the green transformation plan, with the goal of clean energy accounting for more than 90% of the company's total installed capacity by 2025.
The hydropower business showed signs of improvement in the first quarter of 2024. Due to continued low rainfall in the watershed where the company's hydropower station is located, the company's hydropower sector recorded a loss of RMB 826 million in 2023. We currently believe that the company's hydropower business is expected to normalize in 2024. In January-February 2024, due to significant improvements in incoming water, the company's hydropower sales rebounded strongly, up 83% year over year.
Maintaining “buying”: In view of the more cautious expansion of the new energy business and the strong downward pressure on renewable energy electricity prices, we lowered our 2024-2025 profit forecast by 9% and 14% to RMB 5,518 billion and RMB 7.078 billion, respectively. We introduced a profit forecast of RMB 8.844 billion for 2026. We lowered the target price from HK$4.10 to HK$3.70 (thermal power: 1.2 times 2024 net market share; new energy: 8.5 times 2024 price-earnings ratio; hydropower: 12.0 times 2024 price-earnings ratio). Downside risks: extreme weather conditions; lower than expected electricity prices; delays in project progress.