Key points of investment:

Fire and water complement each other, and the company's performance continues to recover. SDIC Electric Power is a comprehensive power operator under the SDIC Group and the only hydropower developer in the Yalong River basin. The company focuses on the field of hydropower and promotes the overall collaborative development of thermal power and new energy sources. In terms of installed capacity, after the Lianghekou Hydropower Station and Yangfanggou Hydropower Station were put into operation, the company's hydropower installed capacity reached 21.28 million kilowatts. The hydropower installed capacity in 2023 accounted for 52.08% of the company's total installed capacity, while the installed capacity of new energy sources in 2023 increased by 52.84% year-on-year to 7.04 million kilowatts. Benefiting from lower fuel costs in 2023, repairing the thermal power division's performance, the company's overall performance has rebounded. Revenue in 2023 was $56.712 billion, up 12.32% year on year, and net profit to mother was 6.705 billion yuan, up 64.31% year on year.

The value of high-quality large hydropower in the Yalong River has been highlighted, and a blueprint for the development of the entire watershed has been drawn up. The total planned installed capacity of the Yalong River is about 30 million kilowatts. It has already been put into operation, and the Kara and Mengdigou hydropower stations in the middle reaches are under construction. The Yalong River basin can already carry out “three reservoirs and seven levels” joint adjustment, and the cascade scheduling capability is strong. In particular, among the power plants that have already been put into operation, the Lianghekou Reservoir, which is at the top, has many years of regulation performance, which can increase the power generation capacity of downstream power plants. The development of China's major hydropower projects has come to an end. Combined with the rapid rise in demand for electricity in the southwest, the scarcity of the company's large hydropower projects is highlighted. The province's lucrative and dry price difference policy that realizes the time value of hydropower and electricity and the improvement of the hydropower delivery mechanism have also supported the steady rise in hydropower prices. The company's hydropower performance has the potential to increase in volume and price.

The quality of thermal power units has improved, and profits have been restored due to lower coal prices. After the company transferred a number of small and medium-sized thermal power units with poor profitability and low environmental efficiency, the capacity ratio of large capacity units of 1 million kilowatts and above rose to 64%. These units are mainly located in coastal provinces and cities, and the location advantage is obvious. Coal prices continued to rise in 2023, and the rapid decline in the company's thermal power costs led to a loss in performance. SDIC Qinzhou's net profit in 2023 changed to 949 million yuan. With the improvement of pricing systems such as capacitive electricity prices, the company's thermal power sector profits are expected to continue to increase in 2024.

The installed capacity of new energy sources is growing strongly, and the water scenery base is progressing steadily. In 2018-2023, the company's new energy installed capacity grew from 1,579 million kilowatts to 7.035,800 kilowatts, and the CAGR reached 34.83%. The share of new energy installed increased from 4.64% to 17.22%. Scenery resources around the Yalong River can also resonate with the Lianghekou mixed storage power station currently under construction in the future, and the fluctuating wind power generation will be adjusted to a smooth power source. Outside of Sichuan Province, the company is also actively investing in landscape projects. According to the company's plan to reach 17 million kilowatts of total installed energy capacity by the end of the 14th Five-Year Plan, the company's new energy sector is expected to maintain high growth in 2024 and 2025.

Maintain a “buy” rating. Taking into account multiple factors such as coal prices, the increase in electricity demand, and the rapid growth of the new energy market, we expect the company's hydropower volume and electricity prices to rise sharply in 2024-2026, the value of thermal power assets will return, and the new energy business will maintain rapid growth.

We maintain our forecast that the company's net profit for 2024-2026 will be 80.38, 87.59 billion yuan, and 9.323 billion yuan, respectively, and EPS of 1.08, 1.18, and 1.25 yuan/share, respectively. The current stock price is 15, 14, and 13 times the 2024-2026 PE, respectively.

Referring to the average valuation level of hydropower companies, we have given 18 times PE based on the company's 2024 EPS, corresponding to a target price of 19.44 yuan/share, corresponding to an increase of 21.0%, and maintain a “buy” rating.

Risk warning: uncertainty of incoming water fluctuations; the impact of fluctuations in coal prices on the profitability of thermal power; fluctuations in new energy electricity prices