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 to 24.32 yuan in 2024 (we expect the company's 2024E net profit to be 35 billion yuan, with a dividend ratio of 70%, and a target price of 34.32 yuan corresponding to the 2024E dividend rate of 2.9%) to maintain the “overholding” rating.
Incident: The company announced 2Q24 that domestic hydropower generation capacity was 67.9 billion kilowatt-hours, +42.5%; including Wudongde Power Station 7.86 billion kilowatt-hours, +32.8%; Baihetan Power Station 11.3 billion kilowatt-hours, +45.9%; Xiluodu Power Station 13.4 billion kilowatt-hours, +69.2% year over year; Xiangjiaba Power Station 7.93 billion kilowatt-hours, +57.3% year over year; Sanxia Power Station 22.2 billion kilowatt-hours, year-on-year + 32.3%; Gezhouba power station: 5.15 billion kilowatt-hours, +23.0% year-on-year.
Q2 There was a high increase in electricity production, and the single-quarter results are expected to accelerate growth. We estimate that the company's 2Q24 power generation has mainly benefited from: 1) the Yangtze River Basin's year-on-year abundance of incoming water: the total volume of incoming water from the Wudongde/Three Gorges Reservoir in 2Q24 was about 21.8/98.2 billion cubic meters, with a year-on-year increase of 11.4%/36.9%; 2) 2Q23 has a low electricity base, with 695 hours of hydropower utilization in China, the lowest value since 2005 (-25.1% compared to the historical average). We expect the company's 2Q24E performance to benefit from a high increase in electricity capacity or is expected to achieve high double-digit year-on-year growth. We expect the energy storage situation to be relatively good, compounded by the low base, and the company's 3Q24E electricity volume may still maintain positive growth: 1) As of July 4, 2024, the water level in the Three Gorges Reservoir was 158 meters, +6.7 meters year on year; 2) 3Q23, the number of hours used by China's hydropower was 1128 hours, which is still 55 hours lower than the historical average since 2005.
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 relative value of the company's stable dividend is expected to increase (see the March 2024 in-depth report “China's Heavy Equipment Works, Stable Dividend Premium Can Be Expected”). Investors' “required dividend rate” for a company can be composed of a risk-free interest rate and a requirement for risk compensation. Currently, the risk-free interest rate is still on a downward channel (2.25% yield due on Chinese 10-year treasury bonds as of July 4, 2024, -39.8 bp), 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 that investors' “required dividend rate” for the company still has room to decline.
Risk warning: Incoming water falls short of expectations, electricity prices fall short of expectations, investment returns fall short of expectations, etc.