Key points of investment:

Event: The company publishes its 2024 mid-year report. In the first half of 2024, the company's revenue reached 118.806 billion yuan, a year-on-year decrease of 5.73%. Net profit to mother reached 7.454 billion yuan, up 18.16% year over year. 2Q24's revenue was 53.439 billion yuan, a year-on-year decrease of 12.05%, and net profit to mother was 2.858 billion yuan, a year-on-year decrease of 29.58%. The company's performance was basically in line with our expectations.

Reduced costs continued to unleash the profitability of thermal power, and the electricity capacity of coal-fired and gas units was squeezed by clean energy in 2Q24. According to the division results disclosed by the company, the company achieved total pre-tax profits of 3.98 and 0.57 billion yuan in the first half of the year, compared with 0.593 and 0.351 billion yuan respectively for the same period last year. The cost side of 1H24 Company's thermal power has improved dramatically. The cumulative unit price of standard coal entering the furnace before tax was 1010.32 yuan/ton, a year-on-year decrease of 11.20%. However, on the electricity price side, the decline was small. In the first half of the year, the company operated power plants settled at 498.70 yuan/megawatt-hour, a year-on-year decrease of 3.21%, and the profitability of thermal power rebounded markedly. Due to the abundance of incoming water from all over the country in the first half of 2024, combined with a high increase in the installed capacity of new energy sources, we estimate that the increase in hydropower and new energy generation in the first half of the year accounted for 27.9% and 36.6% of the country's electricity consumption increase, squeezing the space for thermal power generation. Since the second quarter, the number of hours of thermal power utilization in many places has been under pressure. The number of hours used by 1H24's coal-fired units was 1980 hours, a year-on-year decrease of 66 hours. In particular, the feed-in electricity volume for 2Q24's coal engines and combustion engines was 78.133 and 5.18 billion degrees, respectively, down 9.65% and 7.28% year-on-year. The decline in feed-in electricity volume led to a total pre-tax profit of 1.155 and 0.034 billion yuan in domestic coal, gas, and electricity in the second quarter, a significant decrease from the first quarter.

The installed capacity of new energy continued to rise, and a slight decline in the number of hours used dragged down performance. In the first half of 2024, the company added 2.8451 million kilowatts of new energy installed, including 1.007 million kilowatts (+290.31% YoY) and 1.988 million kilowatts (-20.04% YoY) of wind power and photovoltaics respectively. The total profits of wind power and photovoltaics reached 4.03 billion yuan and 1.245 billion yuan in the first half of the year, compared with 4.024 and 1.002 billion yuan respectively for the same period last year. Although the company's overall wind power installation scale continued to increase, the number of hours used in the first half of the year decreased by 53 hours to 1,200 hours year-on-year, resulting in a slight increase of only 1.8% in wind power feed-in capacity in the second quarter, limiting wind power profit growth. The PV sector, on the other hand, benefited significantly from the explosive increase in installed capacity. Although the number of hours used was reduced by 14 to 594 hours year on year, 2Q24 PV feed-in electricity still increased by 74.6% to 4.977 billion. Profit before tax in a single quarter reached 0.875 billion yuan, an increase of 0.505 billion yuan over the first quarter. As of June 30, 2024, the company's wind power photovoltaic installed capacity was 31.608 million kilowatts (of which 16.518 and 15.09 million kilowatts of wind power and photovoltaics were respectively). Considering the current continuous decline in the prices of fan equipment and photovoltaic modules, the company is expected to accelerate the pace of new energy installations and ensure the achievement of the “14th Five-Year Plan” new energy plan target of 45% clean energy installed and a total installed capacity of wind power photovoltaics exceeding 40 million kilowatts.

The balance ratio continues to be below the 70% red line, and the decline in LPR reduces the company's financial expenses. In 2023, the company's balance ratio fell to 68.33% through loan repayment and bond payments. 1H24's long-term loan size declined again year-on-year, and the balance ratio fell further to 68.05%, remaining below the 70% red line. In terms of perpetual bonds, as of June 30, 2024, the size of the company's perpetual bonds was 79.57 billion yuan, a decrease of 0.056 billion yuan from the end of 2023. The company's asset structure continues to be optimized, and the financial situation is stable, moderate and positive. Interest rates in China have declined continuously recently. China's LPR with a term of 5 years or more dropped by 10, 25, and 10 BPs in June 2023, February 2024, and July 2024, respectively. As an enterprise with high leverage and high advance capital, the company has fully benefited from the reduction in capital costs. 1H24's financial expenses were 3.978 billion yuan, a year-on-year decrease of 0.42 billion yuan. We are optimistic that the company's financial expenses will continue to decline and enhance the company's performance.

Profit forecast and valuation: We maintain the company's 2024-2026 net profit forecast to 11.533, 13.758, and 16.641 billion yuan (the above forecasts all include interest on perpetual bonds). The current stock price is 11, 9, and 7 times PE for 2024-2026, respectively. Based on the significant improvement in the company's cash flow, the decline in coal prices since '24, and the continuation of the trend of high growth in new energy installed capacity, the “increase in holdings” rating was maintained.

Risk warning: risk of falling electricity prices, risk of fluctuating coal prices, declining energy consumption rate