Incidents:

The company released the 2023 annual report and the 2024 quarterly report. In 2023, the company achieved operating income of 23.461 billion yuan, a slight decrease of 0.51% year-on-year compared to the 2022 adjusted value; realized net profit of 7.638 billion yuan, an increase of 5.58% over the 2022 adjusted value. In the first quarter of 2024, the company achieved operating income of 4.42 billion yuan, a year-on-year increase of 3.58% over the same period of the previous year; realized net profit to mother of 1,065 billion yuan, an increase of 17.25% over the adjusted value for the same period of the previous year.

The increase in feed-in tariffs was compounded by a decrease in financial expenses, and the company's performance grew steadily:

By the end of 2023, the company had put into operation an installed capacity of 27.53 GW, including 25.6 GW of hydropower and 1.93 GW of new energy. The company's electricity generation capacity for the full year of 2023 and the first quarter of 2024 was affected by the depletion of incoming water from Yunnan. In 2023, the company's feed-in electricity volume was 106.235 billion kilowatt-hours, a year-on-year decrease of 4.05%; in the first quarter of 2024, incoming water from the Lancang River Basin remained flat year on year. Combined with system adjustment tasks, cascade energy storage was not fully released. The company's feed-in electricity volume was 16.058 billion kilowatt-hours, a year-on-year decrease of 7.25%. Against the backdrop of dry incoming water, the company has maintained steady growth. On the one hand, due to the large-scale introduction of electricity demand in the electrolytic aluminum industry in the province, the electricity supply and demand pattern in the province has continued to rise, and feed-in electricity prices have continued to rise. In 2023, the company's average feed-in electricity price was 218.85 yuan/MWh, an increase of 4.24% over the previous year; on the other hand, the company optimized its debt structure through methods such as early replacement of existing debt with low-interest capital. Financial expenses decreased by 450 million yuan, a year-on-year decrease of 14.14% over the previous year. In the future, due to the limited increase in reliable power installations in Yunnan Province, the trend of tight hydropower supply and demand is expected to continue, and there is still room for improvement in feed-in tariffs.

New hydropower will soon be put into production, and the installed capacity is expected to be further increased:

In 2023, the company acquired 100% of Huaneng Sichuan Energy Development Co., Ltd., and the installed scale of hydropower increased from 22.95 GW to 25.6 GW. The company has two major power plants to be put into operation during the “14th Five-Year Plan” period. Among them, the Toba hydropower station (1.4 million kilowatts installed) located in the Yunnan section of the upper reaches of the Lancang River is expected to be put into operation in June 2024 and all in December 2024; Huaneng Sichuan's Luding Gaoliangbao Hydropower Station (installed capacity 1,116 million kilowatts) is expected to be put into operation in October 2024, and all of them will be put into operation in June 2025. After the two units are put into operation, the company's hydropower installed capacity will further increase by 9.2% to ensure that the company's hydropower installation capacity will further increase by 9.2% Performance growth. At the same time, from a long-term perspective, the company still has abundant hydropower project reserves in the upper reaches of the Lancang River. According to the company's announcement, the company plans to invest 58.4 billion yuan to build the Rumei Hydropower Station (2.6 million kilowatts). The remaining 7 power plants are already in the early stages of preparation, which is expected to increase long-term performance.

Continued decline in depreciation expenses has led to increased profitability:

The company's cost structure is mainly based on depreciation. Since the depreciation period of the hydropower project is far lower than the service life, the profitability of the project will increase significantly after depreciation is completed. According to the company's prospectus, the depreciation period for hydroturbine generators is about 12 years. The company's Gongguoqiao, Nuozadu, and Longkaikou hydropower stations were each put into operation between 2011 and 2014. According to the depreciation period, the company will still experience a peak in depreciation accrual completion in 2024-2026. The company's gross profit margin in 2023 was 56.36%, an increase of 0.65 percentage points over the previous year. In the future, as unit depreciation is further calculated, it will continue to enhance the company's profitability. At the same time, the company has excellent cash flow. In 2023, it achieved a net cash flow of 17.06 billion yuan from operating activities, with a net present ratio of 2.07 billion yuan. The proposed dividend in 2023 is 3.24 billion yuan, with a dividend ratio of 42.4%. The company announced a shareholder return plan for the next three years (2024-2026), promising to distribute profits in cash every year of no less than 50% of the profits available for distribution in that year.

Investment advice:

We expect the company's revenue from 2024 to 2026 to be 26.562 billion yuan, 29.299 billion yuan, and 31.323 billion yuan respectively, with growth rates of 13.2%, 10.3%, and 6.9%, net profit of 8.759 billion yuan, 99.89 billion yuan and 10.692 billion yuan respectively, with growth rates of 14.7%, 14.0%, and 7% respectively. Maintaining the buy-A investment rating, the target price for 6 months is 10.78 yuan.

Risk warning: risk of feed-in tariff fluctuations, risk of project commissioning falling short of expectations, risk of falling short of expected incoming water, risk of falling short of expectations.