Introduction to this report:

2Q24 The company's consolidated business continued to recover. Changes in the incoming water structure during the Yalong River's hydropower shortage period disrupted feed-in electricity prices in the short term, and there is plenty of room for long-term equity installed growth in the Yalong River Basin.

Key points of investment:

Maintain an “gain” rating: maintain the 2024-2026 EPS of 1.16/1.21/1.27 yuan. Referring to industry comparable company valuations, PE was given 19 times in 2024, the target price was raised to 22.04 yuan, and the “gain” rating was maintained.

2Q24 results fell short of expectations. The company's 1H24 revenue was 0.6 billion yuan, +10.2% YoY; net profit to mother was 2.3 billion yuan, +9.7% YoY. The company's 2Q24 revenue was 0.35 billion yuan, +16.4% year over year; net profit to mother was 1.03 billion yuan, +7.0% year over year, in line with previous performance reporting guidelines.

Changes in incoming water structure during the hydropower shortage period in the Yalong River disrupted feed-in tariffs for a short period of time, and indicated that the business continued to recover. The company's net income from 2Q24 investment was 1.08 billion yuan, +3.4% year over year, of which Yalong River Hydropower contributed 0.88 billion yuan to investment income during the same period, -0.1% year over year. In 2Q24, the feed-in electricity volume of Yalong River Hydropower was 18.5 billion kilowatt-hours, +37.4% year-on-year, and the feed-in tariff was 0.309 yuan/kilowatt-hour during the same period, -9.6% compared to the same period. We estimate that the year-on-year decline in 2Q24 Yalong River hydropower feed-in tariffs is mainly due to a significant increase in electricity consumption during the peak season (4/5/6 is the Sichuan Hydropower Dry Period/Flat Water Period/High Water Period, respectively) compared to the same period last year: According to the Sichuan Hydrology and Water Resources Survey Center, the monthly incoming water volume in the Yalong River Basin in April 5/6 2024 was 2.61/2.04/4.18 billion cubic meters. The monthly incoming water volume in the Yalong River Basin in 2024/5/6 accounted for 23.5% of total incoming water volume in 2Q24/29.5% 1%/ 47.4%, compared to the same period in 2023, the monthly incoming water volume of the Yalong River basin accounted for -21.9/-0.7/+22.6 ppts of total incoming water in 2Q23. We estimate 2Q24's total combined profit of -0.028 billion yuan, year-on-year loss (2Q23's combined total profit -0.064 billion yuan). We estimate that the improvement in the company's consolidated business mainly benefits from: 1) the improvement in the incoming water supply in the watershed is driving the increase in electricity volume of the power plants controlled by the company, and the feed-in electricity capacity of the power plants controlled by 2Q24 is 1.2 billion kilowatt-hours, +23.3% year-on-year; 2) The company's 2Q24 gross profit margin is 44.9%, +3.3 ppts year over year; 3) The company's 2Q24 financial expenses 0.11 billion yuan, -0.05 billion yuan year over year.

Yalong River's installed capacity has broad potential for growth, and equity installed capacity is expected to continue to grow. 1) The clean energy base in the Yalong River Basin is planned to have a total installed capacity of 100 GW. As of the end of 1H24, the Yalong River Basin has been put into operation with more than 20.8 GW of clean energy installed capacity. The development and construction of Kara and Mengdigou hydropower, Lianghekou hybrid storage, Zalashan photovoltaic and other projects are being promoted scientifically, and there is plenty of room for long-term installed growth; 2) In addition, the company selected the Pingshan Pumping Power Station (1.2 GW) market-based competitive allocation and development entity.

Risk warning: Demand for electricity falls short of expectations, incoming water falls short of expectations, electricity prices are lower than expected, etc.