Huadian International's 1Q24 performance is in line with our expectations
The company announced 1Q24 results: revenue of 309.5 yuan, -3.2% YoY, net profit of 1.86 billion yuan, +64.2% YoY. The performance is in line with our expectations.
In terms of thermal power: Coal prices have declined, the trend of profit release has not abated, and the core profit of electricity before tax has been restored to about 3 points. In terms of electricity, 1Q24 thermal power feed-in electricity was -0.5% year-on-year, of which coal engine electricity was -1% year-on-year, and fuel engine electricity was +5.7% year-on-year. In terms of ignition price spreads, company-level electricity prices were -4.1% year over year; on the cost side, since spot thermal coal prices were -24% year over year after considering inventory, we believe that the reduction in the company's coal and electricity fuel costs was greater than electricity prices, and the ignition price difference increased year on year, thus achieving 1Q24 profit growth. The company's 1Q24 operating costs were -7.4% YoY, gross profit +91.6% YoY, and gross margin +4.2ppt to 8.4% YoY. At the company level, we estimate that the pre-tax profit of electricity reached 2.6% (about 1 point in the same period last year), reaching a new high since 1Q22.
In terms of investment income: Equity investment income was -2.4% year-on-year. It may be constrained by the decline in coal prices, and the investment income of coal companies will be pressured. The company's investment income mainly comes from new energy and coal. In 2023, against the backdrop of declining coal prices, the company's investment income excluding new energy sources was -63% year-on-year, accounting for -24ppt to 22% year-on-year. We believe that due to the continuous decline in coal prices since the beginning of 2024, 1Q24 comes from pressure on investment income from coal companies. Although investment income from new energy sources has maintained rapid growth, it is still dragging down overall earnings performance. Due to the recovery of the company's thermal power profit, the ratio of investment income to operating profit was -49ppt to 42% year-on-year.
After improving profits, operating cash flow was +79% year over year; financial expenses were -8% year over year. The balance ratio continued to drop in 1Q24, down 2.2ppt to 60.4% from the end of 2023.
Development trends
I am optimistic that 2Q24 earnings will continue to improve year over year, and focus on the high dividend value of Hong Kong stocks. After considering inventory, the average price of spot thermal coal was -17% in 2Q24. We think the decline was higher than electricity prices, and the ignition price spread is expected to continue to rise. We remain optimistic about the company's fuel costs throughout the year. After thermal power's profit is repaired, based on a dividend ratio of about 40%, 2024/2025 will correspond to the dividend rate of 6.2%/7.5% for H shares, respectively, which is attractive for dividends under the undervaluation of Hong Kong stocks.
Profit forecasting and valuation
Keep profit forecasts and valuation ratings unchanged. Keep the target price of 7.32 yuan for A shares unchanged, with 7.87% upside compared to the current share price; keep H shares unchanged at HK$4.69, with 10.98% upside compared to the current share price. Looking at the parent common shareholder perspective, current A shares are traded at 2024E/2025E12.5x/10.3x P/E, the target price corresponds to 2024E/2025E 13.5x/11.2x P/E, H shares are traded at 2024E/2025E 6.9x/5.7x, and the target price corresponds to 2024E/2025E 7.7x/6.4x P/E.
risks
The increase in society's electricity demand fell short of expectations; electricity prices fell beyond expectations.