Incident: The company released its 2023 annual report. In 2023, the company achieved total revenue of 60.677 billion yuan, up 9.6% year on year; achieved operating income of 59.567 billion yuan, up 9.9% year on year; realized net profit of 3.55 billion yuan, up 24.2% year on year; net profit without return to mother was 2,576 billion yuan, up 8.0% year on year. The company released its report for the first quarter of 2024. 2024Q1 achieved total revenue of 15.53 billion yuan, an increase of 2.3% year on year; achieved operating income of 14.801 billion yuan, an increase of 2.6% year on year; realized net profit of 906 million yuan, a decrease of 11.1% year on year; and net profit without return to mother was 1,056 million yuan, an increase of 10.6% year on year.

New orders continued to grow, and scheduled production reached a new high. In 2023, the company achieved new efficiency orders of 86.532 billion yuan, an increase of 31.95% over the previous year; of these, clean and efficient energy equipment accounted for 39.44%, reaching 34.128 billion yuan, an increase of 57.4% over the previous year. With 2024Q1, the company achieved additional orders of 26.329 billion yuan, an increase of 16.42% over the previous year; of these, clean and efficient energy equipment accounted for 42.25%, reaching 11.124 billion yuan, an increase of 30.9% over the previous year. In 2023, the company completed the production of 44112 MW of various power generation equipment (measured in steam turbines, wind turbines and water turbines), an increase of 22.4% over the previous year. 2024Q1, the company's power generation equipment output was 10,204 MW, a year-on-year increase of 63.0%. Overall, the company's new orders have maintained rapid growth, and the continued rise in production schedules indicates that the order side supports continued fulfillment on the performance side. In 2024, the company expects to complete 48,230 MW of power generation equipment production, which will reach a record high.

Profitability is rising steadily, and the wind power business is being dragged down. In 2023, the gross margin of the company's main business was 17.3%, up 0.8 pct from 2022; of these, the gross margin of coal power equipment products was 23.43%, up 0.81 pct year on year; the gross margin of wind power equipment products was 9.94%, down 1.97 pct year on year, and the wind power business lost about 490 million yuan for the year. 2024Q1, the gross margin of the company's main business was 18.7%, an increase of 1.6 pct over 2023Q4. As new orders gradually contribute to performance, we expect the company's profitability to continue to increase.

The loss of fair value of Chuan Neng Power's equity affects short-term net profit performance. The company signed a relevant agreement in 2023 and approved by the China Securities Regulatory Commission. Chuaneng Power acquired 20% of the shares of Sichuan Nengtou Wind Power Co., Ltd. held by Dongfang Electric by issuing shares to Dongfang Electric. Affected by falling stock prices, 2024Q1 caused a fair value loss of 238 million yuan. After excluding this influencing factor and other non-recurring profit and loss, net profit after deducting non-return mother's net profit increased 10.6% year-on-year.

The construction of a new power system brings long-term opportunities for the company's development. The new energy system has the characteristics of “safe, efficient, clean and low-carbon, flexible, and intelligent integration”. More attention is paid to developing renewable energy with high quality and consuming a high proportion of renewable energy. The new power system will bring huge growth demand for equipment in all aspects of the “source network load storage” of the power industry chain. Coal power accelerates the role of underwriting, system regulation, and emergency backup, driving demand and installed capacity growth. It is expected that the scale of new construction will remain high in 2024; nuclear power reached the highest number of approvals in more than ten years for two consecutive years, driving steady market growth; demand for pumped energy storage continues to be released, construction is significantly accelerated, and there is great potential for development; the scale of new gas and electricity installations is expected to remain stable, with plenty of room for demand. At the same time, new energy storage is growing rapidly, hydrogen energy industry technology continues to be upgraded, the application of energy saving and environmental protection in industrial and other fields continues to deepen, and there is still broad market demand in the field of chemical equipment.

Investment advice: The significant increase in the company's new orders in 2023 will contribute to the 2024 performance, and is expected to maintain the good momentum of order growth in 2024; as China's state-owned enterprise “Daikoku Heavy Equipment” for energy equipment, the company will play an important role in the construction of China's “new power system” and take on important tasks, which is not only a challenge for the company's transformation, but also an opportunity for the company's development. Five project results, including Dongfang Electric Group's “Unit Flexibility Peak Shifting Integrated Improvement Technology”, were selected as “Central Enterprise Science and Technology Innovation Achievements Product Manual (2023 Edition)” issued by the State Council's State-owned Assets Administration Commission, which can be described as representative of a new quality of productivity. We expect the company's revenue in 2024-2026 to be 693.23/752.81/81,627 billion yuan respectively, up 16.38%/8.59%/8.43% year on year; net profit to mother is 42.22/48.39/ 5.274 billion yuan, up 18.92%/14.61%/8.99% year on year, EPS is 1.35/1.55/ 1.69 yuan respectively, corresponding PE is 12/11/10 times, maintaining the “buy” rating.

Risk warning: the risk of changes in the macroeconomic environment and macroeconomic policy changes, exchange rate risk, risk of power investment and construction falling short of expectations, risk of fluctuations in raw material prices, etc.