Incident: The company released a performance forecast for the first quarter of 2024. It is expected to achieve net profit of 0.71-0.92 billion yuan, an increase of 129%-196% over the previous year; net profit after deduction of 0.675-0.875 billion yuan, an increase of 157%-234% year-on-year, exceeding market expectations.

With abundant incoming water, coal-fired power installations and coal prices resonated, performance doubled under the support of high electricity demand. According to the company's monthly electricity volume announcement, from January to January 2024, the company's cumulative power generation capacity reached 10.8 billion kilowatt-hours, an increase of 42% over the previous year. On the demand side, the increase in electricity consumption mainly benefited from the cold tide and last year's low base. According to the China Telecommunication Union, the electricity consumption growth rate of the entire society in Hubei Province reached 12.37% from January to January 2024. On the supply side, all of the company's power supplies achieved positive growth in the first quarter. 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. Specifically, 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, mainly benefiting from the increase in demand side electricity and the increase in installed capacity. After removing installed capacity growth factors, the increase in performance may mainly benefit from the decline in spot coal prices and the increase in long-term cooperation ratio. Considering the year-on-year decline in spot coal prices of 5,500 kcal in the first quarter after the coal inventory cycle, the spot coal price of 5,500 kcal 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.

The water level in Longtou Reservoir remains high, and the current low coal price still lays a solid foundation for Q2 performance. According to the Hubei Water Resources Bureau, as of April 12, the water level of the Shuibuya Hydropower Station was 380 meters, compared to 368 meters in the same period last year, maintaining a high water level (normal water storage level of 400 meters); the average outbound flow since April was 494 m3/s, compared to 78 m3/s in the same period last year. Considering that Shuibuya is the leading reservoir in the Qingjiang River Basin, it laid the foundation for high performance in the second quarter under high water levels and high outbound flow. On the other hand, in the second quarter, spot coal prices remained low in recent years, and spot coal prices fell 242 yuan year on year in April. Considering that the company put into operation two million units in Yicheng in the second half of 2023, the holding's installed capacity increased by 43% year-on-year, and the performance enjoyed the dual flexibility of coal prices and installed capacity.

It is worth noting that the Hubei Provincial Development and Reform Commission and the Provincial Energy Administration recently issued the “2024 Work Promotion Plan to Reduce Electricity Costs for Industrial and Commercial Users in the Province”, which covers various fields of power systems and mentions the entry of new energy sources into the market; in conjunction with the new industrial and commercial time-sharing electricity price policy issued by the Hubei Provincial People's Government on April 11 (implemented from May 1), it is expected to have a further impact on photovoltaic electricity prices.

However, we emphasize that the company has been very restrained in developing new energy sources in recent years. Currently, new energy accounts for a small portion of the company's installed capacity, and the short-term increase in performance is not due to new energy. We believe that Hubei's electricity price plan and new energy policy have had a limited impact on the company.

Water and fire have resonated and their performance has improved dramatically, and the reform and valuation of central enterprises is expected to be boosted. The company is a regional integrated energy platform under the Three Gorges Group. As of the first half of 2023, the holding installed capacity was 12.75 million kilowatts, of which 466, 4.63, 1.12, and 2.34 million kilowatts of hydropower, thermal power, wind power, and photovoltaics were respectively. From a valuation perspective, in 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; the thermal power sector, under market-based transactions, the company's excellent unit quality, steady electricity prices in the province, increased long-term cooperation ratio, and doubled installed capacity growth all laid the foundation for the nirvana growth of the thermal power business; in the new energy sector, the company's new energy development was very restrained, and the profits of selected projects were stable. From a performance perspective, it has doubled in the first quarter of 2024. It is expected that due to abundant incoming water and falling coal prices, the company's second quarter and full year results are worth looking forward to.

Profit forecast and valuation: The company announced its intention to transfer shares in Changjiang Securities at the end of March. Considering the uncertainty of the transaction, we will temporarily maintain the company's net profit of 18.1 (disclosure), 2.89, and 3.44 billion yuan in 2023-2025. The current stock price is 13 and 11 times PE for 2024-2025, respectively. Under the segmental valuation method, the intrinsic value of the company is 255 (hydropower) +74 (thermal power) +98 (new energy) +43 (Changjiang Securities equity transfer price) = 47 billion yuan. The company has businesses such as coal trading and natural gas sales. Under conservative estimates, valuation is not considered for the time being, and maintains 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.