Huaneng Hydropower met our expectations in 2023. The 1Q24 performance slightly exceeded our expectations. The company announced its 2023 results: revenue of 23.46 billion yuan, -0.5% year on year, net profit to mother of 7.64 billion yuan, +5.6% year on year, in line with our expectations. The company paid 0.18 yuan per share in 2023, +2.85% year over year, with a dividend ratio of 42.42% (43.64% after 2022 restatement), corresponding to a dividend rate of 1.9%.
At the same time, 1Q24 results were announced: revenue of 4.42 billion yuan, +3.6% year-on-year, and net profit to mother of 1.07 billion yuan, +17.3% year-on-year. Due to rising electricity prices and falling financial costs, the 1Q24 results exceeded our expectations.
Water has been running dry since 2023, but the price of water and electricity was +4.2% compared to the same period, making up for the lack of electricity. 1) In terms of electricity consumption, hydropower sales were -5.2% year-on-year in 2023, mainly due to a decrease in energy storage in the Lancang River at the beginning of the year, and the water level decreased year-on-year in the first half of the year. Among them, the electricity capacity of Xiaowan/Nuozadu was -8.2%/-11.9% compared to the same period. 2) In terms of electricity prices, the price of hydropower was +4.2% to 218.9 yuan/megawatt-hour, mainly because: Lanshang sent electricity to Guangdong High Price Water Plant +4.3% YoY, accounting for +2.3ppt to 25.1% of hydropower volume; the growth of high-energy industries led to tight electricity supply and demand in the province, and electricity prices rose within the 10% range of the average annual electricity price for the previous 3 years.
In 2023, depreciation costs were reduced, and financial expenses were -14.1% year-on-year, making it possible to release profits. In 2023, the company's operating costs were -2% year-on-year, mainly due to the expiration of the depreciation period for some power plant equipment, depreciation expenses decreased year-on-year. After high-interest stock loans were replaced, financing costs fell by about 60 bps year over year in 2023.
1Q24 hydropower was squeezed by the province's firestorm, and electricity volume was -12%; however, electricity prices continued to rise, financial costs were -5.8% year-on-year, and profits exceeded expectations. Electricity sales in 1Q24 were -7.3% year-on-year, with a significant drop in hydropower, mainly because: 1) Yunnan New Energy was put into large-scale production and large-scale operation of thermal power, thereby increasing power generation.
2) Water is stored at the Toba Hydropower Station. Energy storage in Xiaowan and Nuozadu has not been fully released due to grid scheduling. We judge that due to the tight supply and demand of electricity in Yunnan, hydropower prices have seen a considerable year-on-year increase to make up for the shortage of electricity.
Development trends
New energy is being installed rapidly. The Toba Hydropower Station is expected to be put into operation in 2024, and the installed capacity is growing.
In terms of new energy, the company put into operation a total of 1.3 GW in 2023, with a cumulative installed capacity of 1.9 GW. The Tibet region has rich project reserves. In terms of hydropower, 1.4 million kilowatts of the Toba hydropower station and 1,116 million kilowatts of the Jiaoliangbao hydropower station are under construction. The company's 2024-2026 shareholders' willingness to return dividends increased. According to the company announcement, when the balance ratio is 75% or less, the dividend ratio will reach 50%. Due to hydropower injection in Sichuan, the balance ratio was +8.7ppt to 64% year on year in 2023, but fell to 60.4% in 1Q24, and dividends can be expected to increase throughout the year.
Profit forecasting and valuation
As incoming water is expected to improve year-on-year throughout the year and PV production continues, we raised our 2024/2025 profit by 3.1%/8.8% to 8.88 billion yuan/9.8 billion yuan, +16.2%/+10.5% year-on-year. Based on optimistic profit forecasts and strong cash flow from hydropower, the target price was raised 29% to 10.36 yuan, which is 8.3% higher than the current stock price. Currently, A shares are traded at 19.4x/17.6x P/E in 2024/2025, and the target price corresponds to 21x/19x P/E in 2024/2025.
risks
Incoming water fell short of expectations during the flood season, and the progress of conventional hydropower production fell short of expectations.