Key points of investment:

Incident: The company released the 2023 annual report and the first quarter report of 2024. In 2023, the company achieved revenue of 14.695 billion yuan, an increase of 2.63% over the previous year, and achieved net profit of 2,624 billion yuan, an increase of 1.11% over the previous year. In the first quarter of 2024, the company achieved revenue of 3,088 billion yuan, a year-on-year increase of 0.52%; realized net profit to mother of 526 million yuan, a year-on-year decrease of 1.14%. It basically met our expectations.

Production and sales of gas, electricity, and thermoelectric power have increased steadily, and thermal power performance has continued to improve. In 2023, the company's electricity sector revenue was 13.845 billion yuan, up 1.99% year on year. Feed-in electricity reached 22.90 billion kilowatts, up 8.25% year on year. The company sold 17.572 billion kilowatts of electricity, up 12.82% year on year. At the same time, the company's thermal power performance also fully benefited from the increase in feed-in tariffs. In 2023, the company's feed-in tariffs for coal/gas power generation in Fujian Province reached 467.03 and 632.60 yuan/megawatt-hour respectively, up 0.35% and 7.70% year on year; the feed-in price for coal-fired power generation in Guizhou Province was 428.01 yuan/megawatt-hour, up 4.02% year on year. Benefiting from the sharp increase in the company's heating capacity and the reduction in fuel procurement costs, the volume and price of the thermal power sector have risen sharply, supporting the rapid growth in the performance of various subsidiaries. In terms of subsidiary net profit, Jinjiang Gas & Electric increased 18.57% year-on-year to 149 million yuan, Hongshan Thermal Power increased 33.41% to 740 million yuan, and Longan Thermal Power increased 85.28% to 82 million yuan. Demand for peak shifting in China's power grid continues to grow. The natural gas generator sets operated by Jinjiang Gas and Electricity have the advantages of quick start-up and stop, convenient scheduling, etc., which enhance the peak shifting capability of the power grid, and have the potential for continuous growth. In the first quarter of 2024, the company's power generation capacity and feed-in electricity capacity reached 5.326 billion kilowatt-hours, respectively, up 2.37 and 2.27% year on year. The total heating capacity was 2.081 million tons, an increase of 13.22% year on year, and thermal power performance continued to perform well. Coal prices have continued to decline since 2023. The average price of 5,500 kcal thermal coal in Qinhuangdao was 957.69 and 901.74 yuan/ton in 2023Q4 and 2024Q1, respectively. The price center fell further below 900 yuan/ton in April. Against the backdrop of the company's continuing decline in power generation costs, I am optimistic that thermal power will maintain good performance in 2024.

The decline in wind power feed-in prices is compounded by asset depreciation, limiting the profit contribution of wind power. In 2023, the company's total wind power generation reached 5.496 billion kilowatt-hours, a year-on-year decrease of 4.06%. Among them, Funeng New Energy achieved net profit of 970 million yuan, a year-on-year decrease of 23.30%, and Funeng Strait achieved net profit of 468 million yuan, a year-on-year decrease of 31.14%. We believe that wind power profits fell short of expectations due to: 1) Asset depreciation for wind power projects was higher than expected this year, and depreciation expenses in the Funeng Strait increased year-on-year, reducing short-term wind power business profits, causing wind power business costs to rise 31.16% year over year to 1,348 billion yuan. 2) The decline in wind power production and sales combined with the decline in grid electricity prices has put pressure on the net profit of wind power in the short term:

The feed-in tariff for onshore wind power in Fujian Province fell 1.67% year on year to 569.61 yuan/megawatt-hour, and the feed-in price for offshore power generation fell 0.66% year on year to 836.66 yuan/megawatt-hour, causing investment income in the Funeng Strait to drop 22.3% to 419 million yuan. 3) Fluctuations in wind resources limited the number of hours used by power plants for power generation, resulting in a 4.07% year-on-year decline in the number of hours used. In 1Q24, the number of hours used by wind power nationwide fell 19 hours to 596 hours year on year. It is expected that poor wind conditions will continue to limit the growth of wind power performance. At the same time, when 1Q24's profit before tax only increased by 0.07 million yuan, income tax expenses increased by 82 million yuan to 82 million yuan, an increase of 38% over the previous year, which is presumed to be due to the expiration of tax benefits for some wind farms. Considering that the company's “three exemptions and three halves” policies for a large number of wind farms expire one after another in 2024-2026, the short-term performance of the wind power business will continue to be under pressure.

Three Gorges Capital increased its holdings of the company's shares, demonstrating its confidence in the company's long-term development. Three Gorges Capital Holdings Co., Ltd. is a wholly-owned subsidiary of China Yangtze River Three Gorges Group Corporation. Three Gorges Capital increased its shareholding by 109 million shares in 2023, accounting for 10.81% of the company's shareholding by the end of 2023, making it the company's second-largest shareholder. Three Gorges Capital increased its holdings when the company's valuation was at a low level, highlighting its confidence in the development of the company's long-term investment value in the clean energy sector, particularly in businesses such as wind power and cogeneration. At the same time, as a strategic investor, the increase in holdings of Three Gorges Capital will also strengthen the cooperative relationship with Funeng Co., Ltd. and jointly promote the development of related energy projects.

Profit forecast and rating: Considering the rapid decline in fuel costs and the continuous restoration of the company's thermal power performance, we raised the company's net profit forecast for 2024-2025 to 28.14 billion yuan or 3.105 billion yuan (original value was 2,788 billion yuan and 2,929 billion yuan), and added the 2026 net profit forecast to 3.303 billion yuan. The current stock price is 9, 8, and 8 times PE, respectively, which is lower than the industry average and maintains a “buy” rating.

Risk warning: New energy development progress falls short of expectations, incoming wind conditions are weaker than expected, risk of falling electricity prices, risk of rising coal prices