Incident: The company released its 2023 annual report and 2024 quarterly report. Net profit for the full year of 2023 was 1.226 billion yuan, a year-on-year decrease of 61.8%, and achieved net profit to mother of 0.44 billion yuan in the first quarter of 2024, an increase of 46.0% over the previous year. The proposed dividend for 2023 is 0.12 yuan/share, with a dividend ratio of 77.16%. In addition to the mid-term dividends that have already been implemented, the annual total dividend ratio reached 128.59%, and the incoming water continued to decline, leading to a decline in performance. The increase in performance in the first quarter of 2024 may be due to improvements in thermal power and new energy growth. Affected by the La Niña phenomenon, rainfall in the Hongshui River Basin has continued to be low since 2023. The company's hydropower generation decreased by 41.50% year on year in 2023, continued to be subdued in the first quarter of 2024, and hydropower generation decreased by 7.38% year on year. However, the company's performance in the first quarter of 2024 bucked the trend and increased by 46%. Our analysis is mainly due to the low base of hydropower generation in the first quarter, and the overall performance was greatly affected by thermal power and new energy. The company's thermal power generation in the first quarter of 2024 increased 8.83% year on year; wind power increased 28.19% year on year and photovoltaic power generation was 102.67%. At the same time, based on the performance of listed thermal power companies, the drop in coal prices in the first quarter had a significant effect on improving thermal power performance, or was the main reason for the company's performance growth. New energy also contributed to a certain extent (the growth rate is high but the absolute amount is limited).

Rainfall fluctuations did not affect the long-term value of hydropower. The annual dividend rate of 128.59% exceeded expectations and reached a record high. The company will continue to implement mid-year dividends in 2024. For hydropower companies, the impact of abundant rainfall on performance is unavoidable, but natural rainfall fluctuations do not affect the long-term value of hydropower. The core value of hydropower is its ability to generate cash flow, which is extremely low in relation to the macroeconomy. The company plans to distribute 0.12 yuan/share in 2023. In addition to the mid-term dividends that have already been implemented, the total dividend ratio for the whole year will reach 128.59%.

The company's dividend ratios for 2020-2022 were 68.18%, 78.36%, and 49.13%, respectively. On a basis that is already not low, the current dividend amount exceeds net profit due to mother, reflecting the excellent ability of the asset-heavy industry (costs are mainly depreciation) to generate excellent cash flow. According to the company's announcement, the company will continue to implement mid-year dividends in 2024, which will not exceed 60% of the net profit returned to the mother during the relevant period.

Continue to be optimistic about low covariance assets represented by hydropower. We believe that the revaluation of low covariance assets is an inevitable result of market equilibrium, and lower discount rates drive higher valuations. According to Markowitz's portfolio theory, the pricing of individual stocks is determined by their position in the portfolio, and the portfolio equilibrium results influence individual stock pricing. William Sharp further expanded on this basis. In an equilibrium state, the contribution (risk premium) of any stock to the portfolio should be directly proportional to the cost (covariance) that the portfolio pays for it, that is, the famous CAPM model. Simply put, the lower the covariance, the higher the asset valuation. This conclusion can be deduced from a pure formula and has nothing to do with the market's macroeconomic expectations. The characteristic of hydropower is a comprehensive low covariance, and when the discount rate falls, assets over a longer period of time benefit more. Low covariance + long-term period. Hydropower is exactly the intersection of the two paths.

Profit forecast and rating: Based on the company's data for the first quarter of 2024, we maintain the company's 2024-2025 net profit forecast of 2.807 billion yuan and 2.974 billion yuan, respectively, and add the 2026 forecast to 3.102 billion yuan. The current stock price corresponds to PE of 18, 17, and 16 times, respectively. We believe that the hydropower sector has long-term allocation value and maintains a “buy” rating.

Risk warning: Incoming water fluctuates, electricity prices fall short of expectations, and thermal electricity and coal prices are rising.