The increase in the waste rate, market electricity ratio, and income tax rate dragged down performance: the company achieved revenue of HK$1.22 billion in the first half of the year, down 5.4% year on year, and net profit to mother of HK$0.395 billion, down 30.4% year on year. It is in the middle of the forecast range, which is lower than our expectations. The decline in performance was mainly due to a decrease in utilization hours due to an increase in the light disposal rate, a decrease in electricity prices for stock projects due to an increase in the electricity ratio in the market, and fluctuations in the exchange rate of RMB against the Hong Kong dollar. Among the provinces where the company's main projects are located, the worst drop in light abandonment and electricity prices is in Hubei.

Electricity sales increased by 7.4% year on year, and we estimate that the average electricity price dropped by about 8% year on year. Due to the decline in revenue from stock projects, gross margin fell 6.0 percentage points year over year to 64.2%. Financing costs increased 21.6% year over year due to increased bank borrowing. Since mainland subsidiaries are required to pay 5% withholding tax on dividends to companies, dividend withholding tax of HK$0.025 billion was generated for the first time in the first half of the year, resulting in an actual income tax rate of 30.8% (26.4% after exclusion), an increase of 9.0 percentage points over the previous year. The dividend was HK$0.023 per share, with a dividend payout ratio of 48%, which was basically the same as the previous year.

The exchange of Hong Kong dollars for RMB loans has paid off, and a decrease in financing interest rates can be expected. The share of RMB loans with lower corporate interest rates rose from 13% at the end of last year to 22% at the end of June this year, driving the average loan interest rate down from 6.05% at the end of last year to 4.71% at the end of June this year. As the US dollar enters a cycle of interest rate cuts and the share of RMB loans continues to rise, we expect that corporate financing interest rates will still have a lot of room to decline.

Under strict evaluation, the yield of the new project is still high: the company purchased a 0.2 gigawatt photovoltaic project from the parent company in the first half of the year, and plans to acquire 0.7-1 gigawatt throughout the year. Considering future risks, the company evaluates the proposed acquisition project according to strict conditions of a 10% light abandonment rate and a 10% reduction in electricity prices. Due to the sharp drop in the price of photovoltaic modules, the yield of the proposed acquisition project is still high.

There is still a risk that revenue from existing projects will continue to decline: the utilization rate of PV power generation in the mainland fell 1.2 percentage points to 97% year on year in the first half of the year. Meanwhile, in the first half of the year, the National Energy Administration lowered the new energy utilization target from 95% to 90%. At the same time, we expect that the light disposal rate will continue to increase. At the same time, in order to promote consumption, the share of electricity in the market and discount prices will continue to expand. There is still a risk that the company's stock project revenue will continue to decline.

Maintaining neutrality: We lowered our 2024-26 profit forecast by 27%/27%/29%. Due to the recent significant increase in the valuation of the power operator sector, we raised the valuation benchmark from 8.5 times to 10 times the 2024 price-earnings ratio and lowered the target price to HK$1.00 (originally HK$1.16). We believe that until the yield expectations for existing PV projects are clear, the company's valuation will still be suppressed, but the current high dividend rate (5.6% in 2024) will support the stock price and remain neutral.