Incident: The company released its 2024 semi-annual report. In the first half of 2024, the company achieved operating income of 39.38 billion yuan, a year-on-year increase of 0.26%, and realized net profit to mother of 7.11 billion yuan, an increase of 2.16% over the previous year. Corresponding to the second quarter of 2024, a net profit of 3.505 billion yuan over the previous year, an increase of 0.93% over the previous year, in line with our expectations.

Accounting rules led to inflated gross margins last year, and the effect of reducing costs and increasing efficiency in the first half of the year was remarkable. In the first half of 2024, the company achieved 106 billion kilowatt-hours of feed-in electricity, an increase of 0.09% year on year, but the company's electricity sales revenue fell 1.78% year on year in the first half of the year, mainly due to a drop in monthly market-based electricity prices in some provinces, which led to a decrease in the company's average settlement electricity price. The company's average market electricity price fell by about 2.10% year on year. On the cost side, the company's operating costs increased by 7.51% year on year, causing the gross margin of the company's power generation business to drop 4.5 percentage points year over year. According to our analysis, this is mainly due to the long commissioning time of Fangchenggang Unit 3 in the first half of 2023. Fangchenggang Unit 3 was connected to the grid for commissioning in January 2023, and was not put into commercial operation until March 25, 2023. According to the new accounting standards, the power generation during the commissioning phase was directly calculated, and operating income was directly calculated. At this time, the project under construction was not converted, and depreciation was not taken into account, resulting in a high gross margin during the commissioning period. In contrast, the company's gross margin declined significantly in the first half of this year.

In terms of costs, the company significantly reduced costs and increased efficiency in the first half of the year. In the first half of 2024, the company's R&D expenses decreased by 0.37 billion yuan year on year, financial expenses decreased by 0.45 billion yuan year on year, and value-added tax rebates increased 0.31 billion yuan year on year. The decline on the cost side offset the adverse effects of the decline in gross margin, and the company's net profit to mother rose slightly in the first half of the year.

Fangchenggang Unit 4 was put into operation as scheduled in the first half of the year. Currently, the units under construction are being put into operation one after another to ensure the firm's medium- to long-term growth. According to the company's announcement, as of the end of June 2024, the company had 10 nuclear power units under construction (including 6 nuclear power units commissioned and managed by the controlling shareholder). These units are expected to maintain steady growth in the company's nuclear power installations from 2024-2030. According to the nuclear power construction cycle, which will take 60 months to consider, the company's nuclear power production schedule is as follows: 1 unit will be put into operation in 2025 (Huizhou No. 1), 2 units will be put into operation in 2026 (Huizhou No. 2, Cangnan No. 1), 2 units will be put into operation in 2027 (Cangnan No. 2 and Lu Feng No. 5), and 1 unit will be put into operation in 2029 (Ningde No. 5), and 3 units (Ningde No. 3 and 4) in 2030-2031 crew). This means that by 2030, the company will put into operation 1-2 nuclear power units every year, laying the foundation for steady profit growth.

In 2024, the State Council approved 11 nuclear power units, and the company obtained approval for 6 units, further guaranteeing the company's long-term growth. On August 19, 2024, the State Council approved a total of five nuclear power projects, totaling 11 units, with a total installed capacity of 12.93 million kilowatts. Among them, China General Nuclear Power (listed company+group) received the most, with a total of 6 units. Specifically, the approved nuclear power projects include: China Nuclear Power Jiangsu Xuwei Phase I project, which is 2 Hualong 1+1 high-temperature air-cooled reactors, with a total installed capacity of 3.08 million kilowatts, China Power Investment Group Guangxi Bailong Nuclear Power Unit 1 & 2, a total installed capacity of 2.5 million kilowatts, Shandong Zhaoyuan Unit 1 & 2 under CGN (listed company), Guangdong Lufeng Unit 1 & 2, Guangdong Lufeng Unit 1 & 2, Zhejiang Sanao Unit 3 & 4 controlled by CGN Group, with a total installed capacity of 7.35 million kilowatts. After this approval is completed, the total number of nuclear radio stations under construction and proposed by CGN will reach 16 (including the management units commissioned by shareholders). Newly approved projects are expected to begin one after another this year and next, further guaranteeing the company's installed capacity growth during the 16th 5 years.

Profit forecast and rating: We maintain the company's 2024-2026 net profit forecast of 11.87, 12.4, and 13.07 billion yuan, respectively, with year-on-year growth rates of 10.7%, 4.4%, and 5.4%, respectively. The PE corresponding to the current stock price is 21, 20, and 19 times, respectively. Assuming that the 2024-2026 dividend rate remains 45%, the company's dividend rates for 2024-2026 are 2.2%, 2.3%, and 2.4%, respectively, maintaining a “buy” rating. The current valuation level of the Hong Kong stock CGN Power is low. The dividend rates for 2024-2026 are 3.4%, 3.6%, and 3.8%, respectively. It is recommended to focus on CGN Power.

Risk warning: the connection of new projects to the grid falls short of expectations, market-based electricity prices fluctuate