Incidents:

The company announced the 2023 Annual Report and the 2024 Quarterly Report Express. In 2023, we achieved operating income of 23.461 billion yuan, a year-on-year decrease of 0.51%, net profit of 7.638 billion yuan, an increase of 5.58%; Q1 in 2024 achieved operating income of 4.42 billion yuan, an increase of 3.58% year on year, and net profit to mother of 1,065 billion yuan, an increase of 17.25% year on year.

Electricity price increases and financial cost pressure drops throughout the year, and the company's profit continued to grow steadily in 23 years ① The electricity price increase hedged the decline in electricity volume: On the electricity side, 2023 was affected by a series of factors such as a year-on-year decrease in tiered energy storage in the first half of the year, water drying up in the first half of the year, and grid scheduling. The annual electricity generation capacity was 107.06 billion kilowatt-hours, a year-on-year decrease of 4.04%; on the electricity price side, market-traded electricity prices in Yunnan Province continued to rise in 2023. The average monthly market-traded electricity price for the whole year was about 0.252 yuan/kilowatt-hour, which increased the company by about 11.4% year-on-year. Settlement Electricity prices increased by 2.96% year over year. The increase in electricity prices hedged the decline in electricity volume, so that the company's operating income remained basically flat in 2023 compared to 2022; ② The pressure drop on financial expenses has become an effective means for the company to achieve endogenous growth: the company continuously optimizes the debt financing structure and controls costs through methods such as early replacement of existing debt with low-interest funds, etc., and the annual financial expenses were reduced by 14.14% year on year; ③ completed the acquisition of Huaneng Sichuan: In September 2023, the company completed a 100% equity acquisition of Huaneng Sichuan Company, achieving an installed capacity increase of 2.651 million kilowatts. Huaneng Sichuan completed a power generation capacity of 10.99 billion kilowatt-hours in 2023, achieving net profit of 640 million yuan, a year-on-year decrease of about 7%.

The structural increase in electricity prices+financial cost pressure drop was the main driver of 24Q1's performance growth in Q1 2024. Due to factors such as squeezing power generation from other power sources in Yunnan Province and cascade energy storage not fully released due to grid regulation, etc., the company's total power generation capacity was 16.23 billion kilowatt-hours, a decrease of 7.2% over the previous year. Against the backdrop of a decline in electricity consumption, the company achieved a double increase in revenue and profit in the first quarter of '24. The main reasons for our analysis include: ① The year-on-year increase in consolidated electricity prices led to a year-on-year increase in operating income: According to our rough estimate of the company's revenue and feed-in electricity volume in Q1 2024, the company's comprehensive electricity price without tax in Q1 in 2024 was about 0.275 yuan/kilowatt-hour, an increase of about 0.029 yuan/kilowatt-hour over year; ② Financial cost drop: due to a reduction in the financing cost ratio for interest-bearing debt, the company's financial expenses decreased 5.8% year on year in Q1 2024.

Continued increase in installed capacity lays the foundation for future performance growth

① In terms of hydropower installed capacity: In 2023-2025, Huaneng Hydropower has continued to grow: Huaneng Sichuan Hydropower Company added 2.651 million kilowatts of installed capacity after the merger in September 2023 (the company has put into operation with a total installed capacity of 27.528 million kilowatts); in 2024-2025, Toba power station (1.4 million kilowatts) and hardbeam-packed power plants (1,116 million kilowatts) will be put into production one after another, which is expected to bring the company 2.56 million kilowatts of installed capacity by the end of 2025. ② In terms of new energy installed capacity: By the end of 2023, the company's new energy installed capacity was 1.928 million kilowatts, adding 1,313 million kilowatts that year.

Profit forecast and valuation: Taking into account the impact of unstable factors such as incoming water, the company is expected to achieve net profit of 85.8/93/9.84 billion yuan in 2024-2026 (93.3/9.84 billion yuan before 24/25), and the corresponding PE is 19.9/18.4/17.4x, respectively, to maintain a “buy” rating.

Risk warning: Risks such as falling rainfall falling short of expectations, weak electricity demand in Yunnan Province, large fluctuations in electricity prices in the province due to supply and demand, and falling short of expectations in the commissioning of power plants under construction