Introduction to this report:
The company's improvement in Q2 is expected to drive performance growth. Investors “demand returns” are declining, and the molecular denominator side benefits both, and the time is right to reshape the valuation system.
Key points of investment:
Maintain the “Overweight” rating: Maintain the 2024-2026 EPS 1.43/1.51/1.60 yuan. Considering the valuation premium of the company as a hydropower leader with a high dividend ratio, the target price was raised 23 times PE in 2024 (we expect the company's 2024E net profit to be 35 billion yuan, with a dividend ratio of 70%; the target price of 32.89 yuan corresponds to a 2024E dividend rate of 3.0%) to maintain the “increase in holdings” rating.
Q2 The improvement in incoming water is expected to drive growth in performance. We expect the company's 2Q24E hydropower plant's power generation capacity to improve year on year: 1) the output flow rate from the Three Gorges Reservoir from April to May 2024 was +41.6%; 2) China's hydropower utilization hours were 695 hours in 2Q23, the lowest value since 2005 (-25.1% compared to the historical average). The company's 1Q24 also stated that the main business operating profit (operating profit - net investment income - asset disposal income) was 3.96 billion yuan, +3.0% (1Q24's domestic hydropower generation capacity was 52.7 billion kilowatt-hours, -5.1% year over year, and the main hydropower business operations remained relatively stable against the backdrop of a slight decline in electricity volume). We expect 2Q24E's main hydropower business to increase year-on-year growth in the context of improved water intake.
Investors are demanding lower returns, and the time is right to reshape the company's valuation system. We believe that the steady increase in the company's total cash dividend is invaluable. Against the backdrop of declining returns required by investors, the company's stable dividend value is expected to increase (see the March 2024 in-depth report “China's Heavy Equipment Works, Stable Dividend Premium Can Be Expected”). 1) The company's main hydropower business operates steadily (the average value of incoming water in the Yangtze River Basin returns to average for many years), and the scheduling order of hydropower units is superior to thermal power (the number of hours used is basically not affected by the economic cycle). At the same time, with sufficient cash flow support, the company has the ability to further iron out short-term incoming water fluctuations by increasing the dividend ratio in years with strong stable dividend attributes; 2) Due to “triple stability”, the market's DPS expectations for the company's normal incoming water supply are relatively stable. Referring to the Gordon model, we think Mainly by The denominator side requires a change in return r (or “required dividend rate”); 3) Investors' “required dividend rate” for the company can be composed of two parts: risk-free interest rate and required risk compensation. Currently, risk-free interest rates are still in a downward channel, and future investors' “risk compensation requirements” are also expected to decline (market expectations for the stability of the company's dividend amount increase, market style bias is a stable asset with weak correlation with the economic cycle). We believe there is still room for investors to decline in the “required dividend rate” for the company.
Risk warning: Incoming water falls short of expectations, electricity prices fall short of expectations, investment returns fall short of expectations, etc.