Incident: The company released its 2023 annual report and 2024 quarterly report. 1) Net profit to mother was 1.75 billion yuan in 2023, an increase of 50% over the previous year; net profit after deducting non-return to mother was 1.7 billion yuan, an increase of 71% over the previous year, which is the median performance forecast. 2) Net profit to mother was 0.78 billion yuan in the first quarter of 2024, up 151% year on year; net profit after deduction was 0.75 billion yuan, up 188% year on year, which is the median performance forecast.

Lower fuel costs made up for overseas hydropower losses, and achieved a high increase in performance in 2023. According to the announcement, the company's revenue in 2023 was 18.7 billion yuan, a year-on-year decrease of 1.9 billion yuan, a decrease of 9.3%. The decline in revenue was mainly affected by the decline in the unit price of coal sales. In terms of profit, the company achieved net profit of 0.74, 0.18, and 0.58 billion yuan respectively in 2023, with year-on-year changes of -0.13, 1.08, and 0.04 billion yuan respectively. Overseas hydropower stations in Peru were affected by a sharp rise in electricity prices in the spot market during the dry season, leading to an increase in the cost of purchasing electricity from outside sources.

The decline in fuel costs for thermal power offsets the adverse effects of overseas hydropower. In terms of dividends, the company plans to pay a cash dividend of 0.09 yuan per share in 2023. The dividend accounts for 34% of the net profit to mother, which is the same as last year, and the corresponding dividend rate is 1.6%. At the same time, the 2024-2026 shareholder return plan was disclosed, promising a minimum cash dividend of 30% of net profit attributable to mother, and the dividend ratio increased by 15 percentage points over the previous cycle.

At the operating level, by the end of 2023, the company held 15.67 million kilowatts of installed capacity, of which 466, 6.63, 1.21, and 3.17 million kilowatts of hydropower, thermal power, wind power, and photovoltaics were added, respectively, adding 0, 2, 0.18, and 1.08 million kilowatts, respectively. According to the company's revenue by power source and feed-in electricity volume, the company's hydropower (domestic), hydropower (overseas), thermal power, wind power, and photovoltaic feed-in tariffs (excluding tax) in 2023 were 0.3227, 0.7806, 0.4314, 0.5113, and 0.4881 yuan/kilowatt-hour, respectively. The tax-free feed-in tariffs for thermal power, wind power, and photovoltaics changed at -0.006, 0.078, and 0.009 yuan/kilowatt-hour. Domestic hydropower prices remained high, and the price of new energy electricity remained high, and the price of new energy electricity was mainly leveled The impact of the commissioning of the project.

With abundant incoming water and coal-fired power installations resonating with coal prices, 24Q1 performance doubled, and second-quarter results are worth looking forward to. We analyzed that the doubling of the company's performance in the first quarter was mainly due to abundant incoming water and falling coal prices. 1) The cumulative hydropower generation capacity was 3.465 billion kilowatt-hours, up 176% year on year, and electricity volume increased 2.2 billion kilowatt-hours year on year, which is expected to be the core driving force for the company's performance growth. 2) The cumulative power generation capacity of thermal power is 6.1 billion kilowatt-hours, an increase of 12.5% over the previous year. The increase in performance may mainly benefit from the decline in spot coal prices and the increase in the long-term cooperation ratio. Considering the decline in spot coal prices of 5,500 kcal in the first quarter after the coal inventory cycle, spot coal prices fell by about 200 yuan year on year. 3) The cumulative power generation of wind power photovoltaics was 0.53 and 0.75 billion kilowatt-hours, respectively, up 19% and 43% year-on-year, respectively. The increase in electricity volume mainly benefited from the increase in installed capacity. Looking ahead to the second quarter and the whole year, 1) After a fivefold increase in outbound traffic in April, the current water level of the Shuibuya Power Station was 375.6 meters, maintaining a high position at 369.2 meters in the same period last year; 2) The average spot coal price in April fell 53 yuan/ton from January to January.

The Three Gorges are state-owned electric power enterprises, and the reform and valuation of state-owned enterprises is expected to be boosted. From a valuation perspective, 1) the hydropower sector, the diversified power supply structure caused the company's abundant hydropower assets to be drowned out in the company's statements, and the market did not fully understand this; 2) the thermal power sector. Under market-based transactions, the company's excellent unit quality, steady electricity prices in the province, increased proportion of Changxie, and doubled installed growth all laid the foundation for the nirvana growth of the thermal power business; 3) The new energy sector, the company's development was relatively restrained, and projects such as DC in Shaanxi and Wu were selected. In addition, the company's commencement of construction and proposed savings program of 4.4 million kilowatts is expected to contribute to a steady increase in performance. As a public listing platform for power central enterprises (the controlling shareholder, the Three Gorges Group), the company expressed its attitude during the new shareholder return cycle. It is expected that management governance may continue to be optimized under state-owned enterprise reform.

Profit forecast and valuation: The company issued an announcement at the end of March to transfer 9.6% of Changjiang Securities's shares in cash for 4.34 billion yuan. By the end of 2023, the book value of this portion of the shares was 3.11 billion yuan. Based on the company's current incoming water and coal price situation, the increase in performance brought about by the transfer of shares in Changjiang Securities will not be considered for the time being. We raised our 2024 net profit forecast to be 3.1 billion yuan (previous value was 2.89 billion yuan), maintained the 2025 net profit forecast of 3.44 billion yuan, and added the 2026 net profit forecast of 3.84 billion yuan. The current stock price corresponding to 2024-2026 PE is 12, 11, and 10 times, respectively. Maintain a “buy” rating.

Risk warning: The incoming water fell short of expectations, the increase in coal prices exceeded expectations, and the new energy price policy was uncertain.