Introduction to this report:

The company's 1Q24 performance exceeded expectations, and we expect the 2Q24E incoming water to improve.

Key points of investment:

Maintaining the “gain” rating: Taking into account factors such as the company's acquisition of Huaneng Sichuan Company, the 2024-2025 EPS was raised to 0.48/0.55 yuan (original value 0.45/0.48 yuan), and the 2026 EPS was given 0.61 yuan. Refer to comparable companies in the industry and consider that the company's hydropower installations are expected to be put into operation. PE will be given 20 times in 2025, the target price will be raised to 11.00 yuan, and the “increase in weight” rating will be maintained.

1Q24 results exceeded expectations. The company's revenue in 2023 was 23.5 billion yuan, -0.5% year on year (comparable caliber, same below); net profit to mother during the same period was 7.64 billion yuan, +5.6% year over year. The company's 1Q24 revenue was 4.42 billion yuan, +3.6% YoY; net profit for the same period was 1.07 billion yuan, +17.3% YoY, exceeding our previous expectations. The company plans to pay a dividend of 0.18 yuan per share in 2023, with a dividend ratio of 42.4%.

Water and electricity prices are rising, and we look forward to an improvement in incoming water. The company's 2023 feed-in electricity price without tax was 0.219 yuan/kilowatt-hour, +4.2% over the same period last year. 1Q24's feed-in electricity capacity was 161 billion kilowatt-hours, or -7.3% year-on-year, mainly due to: 1) additional 13.3 billion kilowatt-hours of electricity generation from other power sources, squeezing hydropower generation space; 2) 1Q24's two major reservoirs, Xiaowan and Nuozadu, were not fully released, and energy storage was +4.40 billion kilowatt-hours year-on-year; 3) Water storage at Toba Hydropower Station affected part of the power generation capacity.

We expect the year-on-year increase in energy storage in the company's reservoirs combined with the impact of the low base of 2Q23 electricity, and the year-on-year growth rate of 2Q24E electricity may improve.

The acceleration of capital expenditure opens up room for installed growth. By the end of 2023, the company's total installed capacity was 27.5GW, +16.8% year-on-year. The company paid 3.21 billion yuan in cash for the purchase and construction of fixed assets, intangible assets and other long-term assets in 1Q24, +53.2% over the same period last year. We expect the company's “14th Five-Year Plan” hydropower and new energy installations to take a two-pronged approach, and clean energy installations are expected to continue to grow.

Risk warning: Incoming water falls short of expectations, market-based electricity price increases are lower than expected, etc.