1H24 revenue/net profit to mother was +6.6%/-3.6%, and the interim dividend was flat year over year, Hong Kong Density-SS issued an interim report, achieving net profit of 5.57/0.95 billion HKD, +6.6%/-3.6% YoY, and distributed an interim dividend of HK$1.408 billion, accounting for 100% of the revenue available for distribution, corresponding to DPS 15.94 HK cents, which was flat year over year. Under the energy transition target, L12 1H24 gas units were put into operation, the L4/L5 coal-fired units were decommissioned, fixed assets declined slightly year on year, other operating costs rose slightly year on year, and profit forecasts were slightly lowered. We expect the company's 24-26 net profit to mother of HK$3.22/3.5/3.77 billion (previous value of HK$3.29/3.62/3.89 billion), and the BPS is expected to be HK$5.59 in 2024. Considering the stable historical performance of the company, and the control plan agreement stipulates that the permitted profit from the electricity business accounts for 8% of the net fixed assets. It is optimistic that under higher capital expenditure (estimated at HK$22 billion for 24-28), the company's net profit to the mother is expected to increase as capital investment continues to improve. The company is given 1.19 x 2024E PB, which is about 0.5 standard deviation above the historical average (1.07x), and the target price is HK$6.67 (previous value of HK$6.33) to maintain “buying.”

The 2024-2028 development plan was successfully launched, and the 1H24 natural gas power generation ratio increased to about 70% with excellent operating performance. 1H24's electricity business sales volume was +1.8% year-on-year, and the power supply reliability exceeded 99.9999%. Under the Hong Kong government's carbon reduction goals, the company is committed to banning coal-fired units and increasing natural gas power generation capacity. In March 2024, the L12 gas combined cycle generator set with an installed capacity of 380 MW was put into operation. Meanwhile, in January and June 2024, the L4/L5 old coal-fired generator sets with an installed capacity of 250 MW were decommissioned separately. As of 1H24, the company's natural gas power generation ratio increased to about 70%. Furthermore, according to the 2024-2028 development plan disclosed by the company, in terms of coal-fired units, L6 is expected to be decommissioned in 2029; in terms of gas units, the company will build a new L13 (380MW) gas unit, which has already started construction and is expected to be put into operation in 2029. At that time, the company's natural gas power generation ratio will further increase.

Under higher capital expenditure, I am optimistic that net profit to the mother will increase steadily

The company's capital expenditure fell 18% year-on-year to HK$1.375 billion in the first half of 2024. We think it may be related to the high investment in offshore liquefied natural gas terminals in the same period last year (put into operation in July 2023) and the L12 gas engine put into operation in March this year. According to the development plan disclosed by the company, the total capital expenditure for 2024-2028 will reach HK$22 billion. Although this is a slight decrease from HK$26.6 billion in 2019-2023, it is still a large-scale capital investment. Considering that the current control plan agreement stipulates that the permitted profit achieved by the company's electricity business accounts for 8% of the net fixed assets, we are optimistic that after continuous capital expenditure is converted into the company's fixed assets, the net profit to the mother is expected to increase steadily.

Risk warning: Hong Kong's electricity demand falls short of expectations, borrowing cost control falls short of expectations, and capital expenditure investment progress falls short of expectations.