1H24 results fall short of our expectations

Xinyi Energy announced 1H24 results: operating income of HK$1.22 billion, -5.4% year on year; net profit to mother of HK$0.39 billion, or -30.4% year on year. The performance was lower than our expectations and was in line with the performance forecast guidelines, mainly due to increased electricity limit rates and increased depreciation expenses. Interim dividend of HK2.3 cents per share, with a dividend ratio of 48.1%.

Profit before electricity tax fell 26.8% year on year to HK$0.282 per kilowatt-hour for 1H24.

Electricity capacity: 1H24 electricity sales increased 7.4% year over year to 2.02 billion kilowatt-hours, which is lower than the cumulative increase in installed capacity, mainly due to an increase in the power limit rate. By the end of 1H24, the company's installed capacity in Hubei Province accounted for 25.5% of the total installed capacity. According to the National New Energy Consumption Monitoring and Warning Center, the 1H24 Hubei PV utilization rate declined by 3.5ppt year-on-year, and consumption was under pressure due to the high increase in hydropower restoration and photovoltaic installations.

Electricity prices: We estimate that 1H24 electricity prices fell 12.1% year on year to HK$0.599 per kilowatt-hour, the share of affordable projects was +7.2ppt to 55.2% year over year, and the proportion of market-based transactions increased. Starting in May 2024, Hubei Province's new industrial and commercial time-sharing electricity price policy will adjust the peak period from 9:00-15:00 to the 12:00-14:00 valley period, and the remaining 4-hour flat period.

Operating costs were +13.5% year-on-year, mainly due to increased depreciation. 1H24 acquired a 200MW affordable photovoltaic power plant in Zhanjiang, Guangdong, owned by Xinyi Solar, and the company's total installed capacity reached 3,850.5MW.

The share of domestic loans and long-term loans increased, and the real interest rate decreased by 1.4ppt to 4.7% compared to 2023. By the end of 1H24, RMB loans accounted for 21.9%, up 8.9ppt from the end of 2023, and short-term loans accounted for 40.2%. The company expects to continue to increase the mainland's financing ratio in the second half of the year, increase long-term loans, and reduce financing costs. As of the end of 1H24, the company's net debt ratio was 47.3%, up 5ppt from the end of 2023, but still significantly lower than its peers.

Development trends

The company maintains its annual acquisition target of 0.7 to 1 GW, and revenue estimates are more careful. In February 2024, the company signed an agreement with Xinyi Solar to acquire a 790MW affordable project. According to the public results meeting, the company carefully assesses the profitability of potential acquisition projects, taking into account factors such as power limit losses, market-based transactions, high power consumption regions, and stable returns. It generally uses the assumption of a 10% power limit rate and a 10% reduction in electricity prices to screen projects that meet yield requirements. The company is also looking for potential overseas acquisition opportunities.

Profit forecasting and valuation

Due to the increase in the electricity limit rate and market-based transaction ratio, we reduced our 2024-25 net profit by 25.9% and 21.3% to HK$0.85 billion and HK$1.05 billion. Current stock prices correspond to 2024-25 price-earnings ratios of 8.6x and 7.0x. Maintaining a neutral rating, taking into account more careful profit forecasts and the upward valuation center brought about by the increased attractiveness of the overall allocation of power stocks, we lowered our target price by 10% to HK$1.04, corresponding to the price-earnings ratio of 10.1 times and 8.1 times in 2024-25. There is 16% room for improvement compared to the current stock price.

risks

The acquisition of new projects fell short of expectations, the electricity limit rate rose above expectations, and market-based electricity prices fell beyond expectations.