Key points of investment:

Incident: 1) The company announced its results for the first half of 2024, achieving operating income of HK$51.12 billion in the first half of 2024, a year-on-year change of -0.71%; achieving net profit to mother of HK$9.363 billion, an increase of 38.9% over the previous year, exceeding our expectations. 2) The company announced an interim dividend for the first half of 2024. The company paid an interim dividend of HK$0.455 per share, with a dividend ratio of 23.33%.

Thermal power returned to the main source of core profit, and cost-side optimization became the key driver. The total electricity sales volume of power plants affiliated with 1H24 Company was 98.24 billion kilowatt-hours, up 6.2% year on year, of which thermal power sold 72.147 billion kilowatt-hours, up 3.4% year on year. The average electricity price for coal and electricity was 416.7 yuan/megawatt-hour, a year-on-year change of -3.0%. The main reason was that the average utilization hour was squeezed by -1.8% to 2,149 hours by a high increase in hydropower generation, but it still exceeded the national industry average of 50 hours. The unit price of 1H24 Company's standard coal changed -10.6% year-on-year to 934.6 yuan/ton. The coal consumption for electricity supply was also -0.9% to 292.5 g/kwh, and the unit fuel cost was -10.7% to 276.5 yuan/megawatt-hour. Cost-side improvements were stronger than the decline in electricity prices, helping thermal power contribute HK$2.715 billion in core profit against the backdrop of falling coal and electricity prices, accounting for 32.8% of core profit, an increase of HK$1.989 billion over the previous year.

The new installed capacity drove a significant increase in power generation, and wind power photovoltaics performed better than the industry average. 1H24 has put into operation 2.064 million kilowatts of new energy installed capacity, with wind power and photovoltaic project equity installed capacity of 50.4 and 1.56 million kilowatts respectively, marking the smooth start of the company's goal of adding 10 million kilowatts of new energy installed in 2024. 1H24's new energy equity installed capacity reached 24.125 million kilowatts, accounting for 38.4% of the total equity installed capacity of 62.758 million kilowatts. Although 1H24 wind and lighting conditions are relatively weak, and the average number of hours used by wind power and photovoltaics changed year-on-year to -129 and -27 to 1223 and 705 hours, respectively, it is still 89 and 79 hours higher than the national industry average. Thanks to a high increase in installed capacity, sales of wind power and photovoltaics increased by 6.9% and 204.9%, respectively, to 224 and 3.1 billion kilowatt-hours, respectively.

The reduction in borrowing costs helped the expansion strategy, and the blueprint for new energy development progressed steadily. The company's strategic layout in the field of new energy is unswerving. It plans to invest HK$44.6 billion in wind power and photovoltaic power plant construction in 2024, adding 10 million kilowatts of installed capacity for wind power and photovoltaic projects throughout the year. The installed capacity of wind power and photovoltaic equity under construction by the company in 1H24 was 753.2 and 8.011 million kilowatts, respectively. The combined 1H24 average loan cost decreased by 0.43 pct to 2.75%, supporting the company's progress towards the goal of adding 40 million kilowatts of new energy installed in the “14th Five-Year Plan”. It is estimated that the company's renewable energy installed account for more than 50% by the end of the “14th Five-Year Plan”.

Profit forecast and valuation: Considering the continuous improvement on the cost side of thermal power and the continued high growth of new energy installations, we raised our 2024-2026 net profit forecast to HK$14.918, 17.356, and 21.56 billion (previous values were HK$13.225, 15.53, and HK$20.35 billion). The current stock price corresponds to 2024-2026 PE by 7.4, 6.4 times and 5.1 times, respectively, maintaining a “buy” rating.

Risk warning: Coal prices fluctuate, and electricity price policies have changed adversely.