2Q24 The company's performance is in line with our expectations

Sichuan Investment Energy announced 2Q24 results: operating income of 0.35 billion yuan, +16.4% year on year, and net profit of 1.03 billion yuan to mother, +3.4% year over year. The results are in line with our expectations. 1H24's revenue was 0.6 billion yuan, +10.2% YoY, and net profit to mother was 2.3 billion yuan, +9.7% YoY.

2Q24 investment income was +3.4% year-on-year. Yalong River Hydropower and Guoneng Dadu River all contributed positively.

1) On the Yalong River side, the 2Q24 basin was rich in incoming water, and feed-in electricity was +37% compared to the same period. However, electricity prices were affected by the increase in incoming water during the flood season, compared to -9%. We believe that the increase in incoming water during the flood season may structurally lower electricity prices. Looking at 1H24, the net profit of Yalong River Hydropower was +2.5% year-on-year, contributing +2.6% to 2.06 billion yuan in investment income, accounting for 88% of total investment income. 2) On the side of the National Energy Dadu River, 2Q24 electricity was +70% compared to the same period, which was significantly restored. According to 1H24, Daduhe completed a 10% shareholding increase in the same period last year. Due to the electricity volume +35% year-on-year, the investment income was +73% year-on-year to 0.15 billion yuan.

The main business revenue was +16.4% year-on-year, driven by improvements in hydropower and the acquisition of photovoltaic assets. Due to improvements in incoming water, the electricity volume of Sichuan Investment Electricity was +36% year-on-year, and the electricity volume of the 1H24 hydropower sector was +18% year-on-year.

1H24 Pan Renewable acquired Guangxi Rong'an New Energy, so PV power was +14% compared to the same period last year. However, electricity prices in the photovoltaic sector were -17% year over year, under year-on-year pressure, mainly affected by the increase in affordable projects.

2Q24 financial expenses were -11% year-on-year, and the sharp drop in financing costs helped release profits. Due to convertible debt-to-equity swaps and falling interest rates, the company's financial expenses have dropped significantly. Furthermore, in terms of cash flow, due to the acquisition of Guangxi Rongan, operating cash flow was +70%; after the acquisition of Daduhe shares ended, the net cash flow from investment activities reached 0.68 billion yuan (vs. 2.87 billion yuan for the same period last year).

Development trends

The Yalong River and Dadu River are still undergoing conventional hydropower construction and photovoltaic projects, opening up room for long-term growth.

On the Yalong River side, we believe that the Kala and Mengdigou power plants under construction are expected to be put into operation during the “15th Five-Year Plan” period, water and landscape construction will continue to advance, and Kola Phase I photovoltaic and Labashan wind power projects will be put into operation in 2023. On the Dadu River side, we believe that projects under construction such as Shuangjiangkou and Zhuantou Dam are expected to complete the commissioning of some units by 2025. The company promises to pay no less than 0.4 yuan/share under normal operation in 2024-2025, with a stable dividend return level.

Profit forecasting and valuation

Due to the better-than-expected hourly performance of hydropower utilization in the Yalong River, and financial costs were reduced during the year, we raised the company's 2024E/2025E net profit of 5.1%/4.9% to 5.15 billion yuan/5.37 billion yuan, +17.1%/+4.2% over the same period last year. The company has stable dividend returns and enjoys a valuation premium, so we raised our target price by 15% to 18.7 yuan, which is 4.7% higher than the current stock price. Maintaining a “outperforming the industry” rating. The current stock price is trading at 2024E/2025E 17.7x/17x P/E, and the target price corresponds to 18.5x/17.8x P/E.

risks

The drop in electricity prices in the Sichuan region exceeded expectations; water and landscape construction fell short of expectations.