Introduction to this report:
The company's main business profit declined in 2Q24, and performance grew steadily; we believe that the issuance of convertible bonds will help ease financial pressure, and nuclear power approval strengthens long-term growth expectations.
Key points of investment:
Maintain the “gain” rating: reduce EPS from 2024 to 2026 to 0.23/0.25/0.26 yuan (previously 0.25/0.26/0.28 yuan). Referring to comparable company valuations, considering the company's long-term continuous growth and the scarcity of nuclear power in H shares, the company was given 15 times PE in 2025, and the target price was lowered to HK$3.90 to maintain the “gain” rating.
2Q24 results fell short of expectations. The company's 1H24 revenue was 39.4 billion yuan, +0.3% year over year; net profit to mother was 7.11 billion yuan, +2.2% year over year. 2Q24 revenue was 20.2 billion yuan, -3.77% year over year; net profit to mother was 3.51 billion yuan, +0.93% year over year. Performance was lower than our previous expectations.
Profits in the main business declined, and performance grew steadily. The company's 2Q24 holding feed-in capacity was 42.4 billion kilowatt-hours, -1.1% year-on-year; the associated enterprise feed-in capacity was 11.8 billion kilowatt-hours, or -3.0% year-on-year.
The company's 2Q24 gross profit margin was 37.9%, -6.1 ppts year over year; net profit was 5.49 billion yuan, -3.4% year over year. We believe that the different trends in 2Q24 net profit and net profit due to the decline in minority shareholders' profit and loss: 2Q24 minority shareholders accounted for 36.2% of profit and loss, -2.8 ppts year over year. We speculate that it is mainly related to structural differences in power plant profits with different shareholding ratios. Taking the joint venture company/Fangchenggang Nuclear Power (shareholding ratio 75.0%/36.6%), 1H24's net profit was 1.52/0.99 billion yuan, accounting for 14.0%/9.1% of the company's net profit; net profit to mother was 1.14/0.36 billion yuan, accounting for 16.0%/5.1% of the company's net profit to mother.
Convertible bonds relieve financial pressure and are approved to strengthen forward growth expectations. In June 2024, the company plans to issue A-share convertible bonds totaling no more than RMB 4.9 billion for the construction of units 5 and 6 of the Lufeng Nuclear Power Plant. In the context of simultaneous construction of multiple units, the scale of the company's capital expenditure is still expanding: the planned capital expenditure for 2024 is 30.59 billion yuan, compared to the capital expenditure in 2023, +16.34 billion yuan; the net operating cash flow for 2023 is 33.12 billion yuan, +1.75 billion yuan over the same period last year. We believe that issuing convertible bonds will help relieve the company's financial pressure and lay the foundation for sustainable growth. In August 2024, the company approved 6 new nuclear power units, the highest number of approvals in recent years (2/2/0/2/4 nuclear power units were approved from 2019 to 2023, respectively); the number of approved nuclear power units awaiting FCD and construction was raised to 16. Considering the nuclear power construction period (around 5 years), we expect the newly approved units to be put into commercial operation in 2029 and beyond, strengthening the company's long-term growth expectations.
Risk warning: The price of nuclear power is lower than expected, and the number of hours of use falls short of expectations.