1Q24 results are in line with our expectations

The company announced 1Q24 results: revenue of 576 million yuan, +5.1% year over month, -27.3% month on month; net profit to mother was 90 million yuan, +9.6% year over year, turning a loss from month to month into a profit, in line with our expectations.

Various sectors generally showed steady growth: 1Q24 industrial energy efficiency revenue was 293 million yuan, +9.2% year over year, including distributed photovoltaic revenue of 241 million yuan, +12.2% year on year, building energy efficiency revenue of 175 million yuan, -0.9% year on year, and comprehensive resource utilization revenue of 77 million yuan, +10.3% year on year.

In terms of profitability, biomass losses may have decreased compared to the same period last month. 1Q24 Company's comprehensive gross profit margin was 28.8%, +5.38ppt month-on-month, -4.97ppt, consolidated net profit margin 15.6%, +20.17ppt month-on-month, and +0.64ppt year-on-year. Cash flow from 1Q24 operating activities was 198 million yuan, +537.45% year over year, mainly due to the year-on-year increase in the company's accounts receivable repayment amount.

Development trends

We attended the Southern Grid Energy offline performance conference. We sort out the company's development strategy:

The first is to firmly expand the energy saving business. The company is the earliest integrated energy service provider in China. By the end of 2023, the company had a total energy saving area of 9.85 million square meters of buildings, hosted 784 million kilowatts of electricity for customers, and 1,000 energy-saving service customers, spanning 16 industries and departments. In the past two years, the company has mainly switched to 4 types of customers: 1) rapidly promoting overall development scale and efficiency through group customers; 2) government agencies; 3) high-quality customers such as hospitals and schools; 4) industrial park customers to carry out large-scale and intensive development.

The second is to develop strategic emerging businesses. In 2023, the State Council's State-owned Assets Administration Commission launched the Central Enterprise Industrial Renewal Action and the Future Industry Launch Campaign to push central enterprises to accelerate the layout and development of strategic emerging industries. China Southern Power Grid fully undertakes the central enterprise's industrial revitalization action plan. In the implementation plan to accelerate the development of strategic emerging industries, China Southern Power Grid will focus on building a comprehensive energy industry cluster closely related to the company's business as one of the “six major projects.” The company's business mainly includes distributed photovoltaics. At the same time, the company is developing decentralized wind power and household photovoltaic businesses. The company has already carried out basic investigations on decentralized wind power in the five provinces and regions of the Southern Grid. Recently, the company obtained approval for the first decentralized wind power project in Xinyi, Maoming. The company recently recruited a number of distributed photovoltaic projects (including household use), about 600MW+.

Third, strategically exit biomass and lay out virtual power plant business. The company actively cooperates with the construction of new power systems, uses more than 1,500 users in existing operations to aggregate resources and increase added value in terms of power market response and demand-side response.

Profit forecasting and valuation

We maintain our 2024/2025 net profit forecast of $59/84 billion. Maintaining an outperforming industry rating and maintaining a target price of 5.45 yuan, corresponding to 35/24.5 times P/E in 2024/2025, with 14.7% upside compared to the current stock price. The current stock price corresponds to 2024/2025 30.5/21.3 times P/E.

risks

The exit from the biomass business fell short of expectations, continued losses, and new installed capacity fell short of expectations.